The only thing we can say with certainty is that the fallout from coronavirus is going to be brutal | Greg Jericho

Parts of the Australian economy will need a decade to bounce back – and some parts will never recover

If by now you’re not at least a little bit scared, you’re probably not paying attention, and if you think you know what is going to happen, you’re probably lying.

Right now everything is in flux. The economic data that we are going to see will destroy previous norms.

During the GFC for example Australian government revenue in four years fell from 25.0% of GDP in 2007-08 to 21.3% in 2010-11.

This crisis could make that fall seem sedate.

The budget deficit and government debts levels are going to soar, and the old views that it matters will – with luck – quickly be forgotten.

It’s clear investors have no clue what is going on.

In the past eight days the ASX200 has fallen and risen with a volatility never before seen – and not just from day to day but even during the day.

Typically the high point of the ASX200 during a trading day is about 1% above the low point. Last Friday however, the closing price was 13.7% above the low point of trading that day – a record gap:

All we can say with much certainty is that it is going to be brutal. Westpac are now predicting the unemployment rate will hit 7% by October.

That would see a 1.8% point rise in nine months – roughly equivalent to what happened during the GFC, but well below the levels seen during the 1980s and 1990s recessions:

But Westpac issued that advice before Scott Morrison announced a ban on indoor events of more than 100 people and the advice not to travel overseas.

Certainly the latest leading employment indicator issued on Wednesday by the Department of Education, Skills and Employment provides no joy.

In March the indicator fell 0.44 points – the biggest one-month fall since the GFC:

Certainly such times also highlight just how quickly data can become out of date.

On Tuesday the latest residential house price data showed 2.5% annual growth across the nation with Sydney and Melbourne recording increases of 4.7% and 5.3% in the December quarter alone.

Those figures were before even the bushfires, let alone coronavirus. And to be honest they were no surprise given how housing finance has been booming:

Normally we would expect house prices to keep rising for at least the next six months.

But normal departed the scene a while ago.

That does not however mean we will have a housing price crash.

Eliza Owen from property researcher CoreLogic argues that unlike the share market, Australia’s house prices have generally held up well during economic downturns.

During the GFC when lending finance growth fell about 25%, house prices dropped just 4.5%. Given the recent price declines it may be that there is less of a bubble to prick than there otherwise would have.

What we can say with near certainty is that the Reserve Bank will cut rates next month. By how much is unclear – they might not go to 0, but they may go past 0.25% and settle around 0.1%.

What is also clear is that we are unlikely to ever see interest rates at the levels they were before the GFC for at least a decade.

When the Howard government bragged about “record low interest rates” the cash rate was 4.25%. Back then our level of household debt was around 117% of annual household income; now it is 186%. Our interest payments then were just equal to 7.1% of total household income; now they are already at 8.2%.

We pay lower rates, but we have much more debt:

It means that a cash rate of 4.25% would now create higher interest repayments than that which occurred just before the GFC, when the cash rate was above 7%.

The RBA no longer needs to raise rates by as much to slow the economy. And unless we are about to experience the greatest surge of economic growth in our history, I can’t see the cash rate reaching even 4% this decade.

We also know from previous recessions that we are about to see a decade or so of living standards below what we could have expected.

It took nine years for Australia’s GDP per capita to return to the levels it was projected to reach before the recession hit in 1990:

But we face particular issues this time. As I noted last week, unusually for an economy that might enter a recession, we have not been experiencing a boom period.

After the 1990s recession, real household income per capita fell 8%, and it took nearly six years to return to the level it was in March 1990. But our current real household income per capita has already been falling for more than five years:

What previous recessions show is the labour market is about to undergo a massive change. And the biggest change will be for male full-time workers.

The recessions of the 1980s and 1990s and even the GFC saw the percentage of men working full-time collapse.

And it never recovered:

The next six months look set to shift what we regard as normal – not just in our economy but our society.

The government and Reserve Bank will need to do all they can to reduce that shift, but experience shows that some things in the economy will take five to 10 years to recover to where they were, and some things will never recover.

• Greg Jericho writes on economics for Guardian Australia


Greg Jericho

The GuardianTramp

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