What if...:
Annette Sampson
THREE POSSIBILITIES
First, let’s establish just how the economists categorise recoveries. The best option, which is looking increasingly unlikely both here and globally, is a V-shaped recovery where growth falls quickly and then kicks back up again. V-shaped recoveries are typically short and sharp, doing a minimum of long-term damage.
Then there’s the U-shaped recovery where the economy falls, then muddles along at this lower level for a period, before rising up out the other side. U-shaped recoveries take longer than V-shaped, but once things start to get better they improve fairly quickly.
Which brings us to the W-shaped recovery. This is also known as a doubledip recession. In terms of confidence, these are much more damaging than other types of recoveries as the economy seems to be on the rebound and then plummets back into recession. Businesses and consumers who managed to get through the first dip can lack the resources to get through a second downturn.
But as bad as that sounds, it’s not the most damaging type of recovery. The L-shaped recovery is a scenario where there is an extended downturn and, while the economy does start to grow again, it takes many years for it to reach the precrisis level again.
Some have also referred to a “swoosh” recovery where the downturn is followed by a prolonged slow uptick – much like the Nike logo.
WHY TALK OF A “W”?
The upswing in Covid-19 cases in Victoria and globally in June has basically put paid to hopes for a V-shaped recovery. Whether this constituted a second wave of the virus, or merely an extension of the first wave, it has raised the risk of recovery being a longer and harder path than many initially hoped. The initial opening up of economies after lockdown had proven positive for the Australian and some overseas economies. Job growth in May and June had been surprisingly strong, and the Reserve Bank noted a pick-up in retail spending locally. But can the rebound can be sustained?
The OECD has modelled scenarios for both a one-hit and double-hit outbreak (see graph). It shows that a second
outbreak triggering a return to lockdowns would create a W-shaped recovery, but in either case world growth is unlikely to be back to levels seen at the end of 2019 for at least another two years.
Under its double-dip scenario, world economic output would fall by 7.6% this year and climb only 2.8% in 2021. That compares with a 6% fall if we avoid the full second wave.
It estimated that the Australian economy could drop by 5% in 2020 under the singlehit scenario, increasing to 6.3% if everything went W-shaped.
While noting Australia had fared better than many other countries, and was less at risk of a major second wave with its borders closed, the OECD noted our high levels of household debt pose a threat to recovery and measures such as JobKeeper may need to be extended.
Fortunately, it believes Australia has the means to fund a strong response if there is a second outbreak or the recovery falters.
EMPLOYMENT IS KEY
Household debt is most likely to raise its ugly head as a problem if unemployment worsens. To some extent, households have been shielded from debt by relief packages and programs such as JobKeeper, but that can’t be extended indefinitely.
The OECD predicted our unemployment rate will be 7.4% this year and rise in 2021 to 7.6%, even without a second hit to the economy. If the second hit results in going back to a full national lockdown, it predicts unemployment of 7.6% this year and 8.8% next year. According to the ABS, the unemployment rate in May was 7.1%.
In its May statement on monetary policy, the Reserve Bank said unemployment was likely to hit around 10% in the June quarter, although it expected both growth and employment to improve in the second half of the year. However that was before infections in Victoria got out of hand.
Annette Sampson has written extensively on personal finance. She was personal finance editor with The Sydney Morning Herald,a former editor of the Herald’s Money section and a columnist for The Age. She has written several books.