Thankfully, downturns in the economy don’t come around all that often, which is fortunate because they lead to hardship for many people. Each recession is different, which means the path and policies to recovery will also be different. In this article we provide you with some things to look out for in determining the way forward and aim to help you put things into perspective.
A recession occurs when there is a reduction in the amount an economy produces, referred to as Gross Domestic Product (GDP), for two quarters in a row. GDP is made up of consumer spending on goods and services, investments made by companies, government spending and the difference between exports and imports.
For the first quarter of 2020, the Australian Bureau of Statistics calculated a reduction in Australia’s GDP of 0.3%. Figures for the second quarter aren’t available yet, but due to the Covid-19 lockdown measures that have been put in place, it’s generally expected by both investors and economic experts that there will be a further reduction in GDP which will officially place the economy in a recession.
Share markets are driven by the forward-looking expectations of investors. In March, when news of the spread of the Covid-19 virus was looking dire, share markets entered a downturn due to expectations of a severe recession not just in Australia but around the globe.
Recessions affect share markets because they generally mean a reduction in income for consumers which in turn means they spend less, and sales and profits for businesses decline. The decline in company profits may be spread widely or concentrated in particular industries. For example the hospitality and tourism industries have been hit hard during Covid-19, but the likes of Coles and Woolworths have seen an increase in sales.
In reaction to Covid-19 the Australian government released Australia’s biggest ever economic stimulus package, quickly putting policies in place to provide income support to offset dramatic falls in economic activity. Many of the policies seem to have succeeded in the short term providing much needed income to individuals and businesses in Australia.
The drastic increase in government spending has placed a greater debt burden on the government that eventually has to be paid back, but this is a far better outcome than letting the country slide into a deep recession with potentially millions of people out of work. Deep recessions can last years and are difficult to come out of. The aim of the government support is to make the impact of the recession as shallow and as short as possible.
Most recessions come along when central banks increase interest rates to reduce inflation and other excessive behaviours in the economy. As interest rates rise people reduce their spending on goods and services, diverting it to interest payments. As spending in the economy falls, a recession is induced.
The current economic downturn is different as it was the government’s enforced lockdown restrictions for healthcare reasons that brought about the fall in spending and job losses, not because inflation was getting out of hand as is often the case in previous recessions.
Because it came about in an unusual way, it’s hard to predict how Australia will emerge from this recession. A dramatic return to normal by the third quarter of this year may be possible if progress on controlling the virus continues as it has over the past month. This would support most activity returning to normal although normal may be forever changed with tourism, education and leisure returning to pre-Covid levels more challenging due to the continuation of international border closures.
We will be looking at different things to help us understand the situation. One will be the level of employment in the economy and how it compares to the pre-Covid level. As shown in the chart below, nearly 600,000 less people were employed in April 2020 compared to March 2020 as a result of the lockdown restrictions. The shape of recovery in employment will be a key factor in the recovery of the Australian economy.
Looking at other factors will also inform our views around the state of the Australian economy. Three of the largest industries by value are mining, tourism and education. Tourism and education have been heavily impacted by Covid-19 due to travel restrictions imposed by the Federal government and the state border restrictions in place. One way of seeing this impact is in the arrivals of non-citizens into Australia. In the chart below you can see the arrivals of non-citizens into Australia fell to almost zero in April 2020 after averaging around one million a month. This is made up of people travelling to Australia for business, employment, tourism, education and immigration.
Domestically, restrictions are beginning to be lifted, allowing people to travel quite freely within their respective states. Some improvement in the tourism industry will result, with the hope that Australians will replace their international travel with domestic travel. We expect it to be a tough 2020 for tourism operators that have been dependent on Chinese and US tourists as the Australian border may be closed for some time for non-citizens.
How quickly the economy returns to pre-Covid levels is an important issue for all of us. Naturally it will depend on many different factors and we will be looking out for them to understand the economy in the next few years. We remain optimistic that the economic impact will be reasonably short-lived in Australia and that by the end of 2020 most parts of the economy will be running at close to normal levels, with international tourism being the one area that is likely to take longer to return to a more normal level due to ongoing Coivd-19 cases around the globe.
People getting back to work, spending and socialising again will all help businesses return to profitable trading and will support share markets, although there may be further volatility along the way as progress towards a vaccine has its ups and downs.
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