Words|| Ziyan Tejani
In spite of the dichotomy that has been drawn by many, dealing with COVID-19 is as much an economic challenge as it is a health challenge. The two dimensions are so intertwined that it would be a mistake to linearly switch from one to another – they must be dealt with simultaneously. Managing the dynamics of such a complex situation is not a familiar or comfortable experience for economists, epidemiologists, or policy-makers. This is uncharted territory for all. As such, COVID-19 presents an unprecedented and uniquely difficult balancing act going forward – to address serious public health concerns whilst minimising economic devastation.
The swift and significant initial shock of the COVID-19 pandemic and subsequent shutdown measures have had a wrecking ball effect on the global economy. The World Bank forecasts that the global economy will shrink by 5.2% in 2020. This would put the world into the deepest recession since World War 2, despite significant efforts on the part of many governments to counter the downturn through monetary and fiscal policy support. The pandemic is also anticipated to push most countries into recession this year, with income per capita contracting in the largest fraction of countries internationally since 1870. This will tip millions into extreme poverty this year. Advanced economies are projected by the World Bank to shrink by 7%, which will spill over to developing economies which are expected to contract by 2.5%.
The hardest hit countries have been the ones with a heavy dependence on global trade, tourism, exports of commodities and externally sourced financing. In the longer term, the recessions are expected to leave lasting legacies through lower investment, an eroding of human capital through foregone work and schooling, and the fragmentation of international trade and supply linkages. Global stock markets have also seen their sharpest crashes since the Global Financial Crisis.
In the global arena, Australia has withstood the COVID-19 pandemic better than almost any developed nation, and is among a small number of countries which have led the world through their quick, decisive, and proportionate response. However, Australia’s relative success at containing the coronavirus has come at a high economic cost – the first recession in 30 years.
Household incomes have taken a significant blow from job losses and less hours available for work, which will take years to recover. Meanwhile, wage growth is expected to stagnate and house prices are steeply falling. The Australian dollar has also fallen to its lowest point since the Great Depression. In addition, during the Great Depression, unemployment rose from 3.2% in 1929 to 16% in 1931. In Australia, unemployment in July already hit 7.4% and the Department of Treasury anticipates this to quickly reach 10%.
In response, Treasurer Frydenberg has fronted the largest economic bailout in Australian history, with a $17.6 billion economic support package and a $2.4 billion health package among others. The $130 billion JobKeeper program, targeted at tackling unemployment, has served as an economic lifeline for over 5 million workers on the program.
The JobKeeper and JobSeeker programs have also been instrumental in providing cash boosts for small to medium business, which make up 99% of the economy and employ 2 out of 3 workers. It has also provided a powerful psychological boost, with surveyed consumer confidence having its largest recorded weekly gain, rising by 10.1% in the week after the programs’ announcement in March.
Resource management has also been effective in ensuring that states and territories have not reached a point where their healthcare systems have been overwhelmed. The acquisition of medical stockpiles of medicines and masks, a three-fold increase in hospital beds and the purchase of many additional respirators has put our medical sector in a strong position to manage the outbreak on a much larger scale.
That being said, the imposition of lockdowns and border closures have been devastating to certain sectors of the Australian economy. The tourism industry is clinging for survival and has been described as “ground zero” for the COVID-19 induced recession. The $150 billion sector has been hit multiple times in 2020, which is the worst year for the industry in living memory.
The culmination of the summer bushfires, the closure of state and national borders and the lockdowns have devastated the sector, including accommodation, restaurants and travel agents. In addition to that, the Australian Financial Review has found that the $300 billion retail sector enjoyed some short-term gains, experiencing record monthly sales growth in May as a consequence of government stimulus incentivised spending and pent-up demand, but they were only short-lived. Furthermore, the retail sector was struggling prior to the pandemic, with weak consumer confidence, weak wage growth and high household debt. And speaking of the longer-term, the pandemic has only amplified these factors.
The unprecedented economic spending by our government for short-term stability will undoubtedly have negative long-term effects on the strength of our economy.
As of August 2020, the Treasurer is estimating the economic costs of all of its federal stimulus and other discretionary programs at $1 billion a week. As such, instead of reaching a surplus, as anticipated at the end of this year, a PWC report estimates that this debt will remain until at least 2057. Therefore, an 18-year-old cannot expect to see a budget surplus until they are 37 years old, and will not see an economy with a net zero debt until they reach 55.
This is very much in line with the findings of ANZ Senior Economist, Cherelle Murphy, who states that Australia will be in approximately $230 billion debt in 2021, which she has described as ‘the biggest deficits we have seen since WW2.’ However, even these figures greatly understate the long-term economic adversities, as they don’t account for the loss of consumer confidence and the longer-term weakening of our productive capacity and industry.
These widening debts and deficits are dangerous for our future, as future governments will have less wealth and tax revenue to address the multiplicity of economic and social problems which may arise. At the same time, the high costs of the economic stimulus programs mean that there will be less scope for discretionary fiscal policy in many years ahead, limiting the Australian government’s ability to deal with exogenous shocks, such as severe downturns in the current tumultuous area of trade for example.
The more time it takes before the economy can fully reset, the weaker and more fragile the Australian economy will be.
In addition, a strong and responsive health system relies on a strong economy which in turn relies on productive citizens and industry. Therefore, in prioritising short-term health concerns over fiscal responsibility, in the longer term this may have the opposite effect than intended, and might leave our healthcare system and broader economy weak and vulnerable.
Clearly, the cause, scope, and magnitude of this economic downturn is unprecedented and unique from any other in living memory. The road to a steady recovery will require finding the right balance between keeping the economy running efficiently, while also minimising the spread of the virus. Now that Australia has effectively contained the health crisis at the moment, it is the immediate priority of policy-makers to hasten economic recovery.
Without immunization, the ongoing virulence of COVID-19 makes returning the economy to normalcy almost impossible. Therefore, while the world waits for a vaccine, domestic policy-makers should ensure that state and territory healthcare systems remain adequately resourced to prevent any becoming overwhelmed in the future, and that safety measures remain and are enforced effectively.
Sustaining domestic economic activity through stimulus programs, providing financial support for households, firms, and essential service providers are also paramount. Global coordination and cooperation should also be prioritised, to slow the spread of the pandemic internationally and provide economic relief to those who need it most. These measures will provide the greatest chance of a robust economic recovery.