Forget the technical jargon – Australia’s in a Covid recession right now
Forget the technical jargon – we’re in a recession right now and, without jobkeeper, getting out is going to be a lot harder.
Retail spending is falling, especially among hospitality businesses in Sydney and Melbourne that are now completely reliant on takeaway and delivery to keep ticking over.
Rows of empty shops have knocked the teeth out of what were once fashionable retail and entertainment streets.
And while Queensland has so far avoided the lockdowns that have gripped Sydney and Melbourne, it too could tip over if the highly infectious Delta strain crosses the border from New South Wales.
When talking about economic slumps in Australia, the political and media classes tend to use the phrase “technical recession”. This means two consecutive three-month periods where the economy shrunk.
On this measure, as long as Sydney and Melbourne escape lockdown by the end of the year, there will be no repeat of last year’s Covid recession because even if growth is minimal in the three months to the end of December, it will come after a quarter in which the treasurer, Josh Frydenberg, expects the economy to shrink by 2%.
But as he surveys the economic damage wreaked by locking down more than half the nation’s economy, Gareth Aird, head of Australian economics at Australia’s biggest bank, the Commonwealth, says the term “technical recession” is “not fit for the times”.
In the US, the commonly accepted definition is laid down by private sector group the National Bureau of Economic Research (NBER): “A period between a peak and a trough in the business cycle where there is a significant decline in economic activity spread across the economy that can last from a few months to more than a year.”
On that measure, is Australia already in a recession?
“Yes, that’s correct,” Aird says. “And that’s a much better definition.”
Sarah Hunter, the chief economist at BIS Oxford Economics, points out that the NBER definition is subjective and that the organisation has the benefit of making its decisions on what counts as a recession after the fact.
She says that given the extension of lockdowns in Melbourne and Sydney until October or November, and the economic data that is emerging for August, “I would expect the NBER committee to define the current period as a recession”.
Some of that data is grim. Figures from point-of-sale provider Lightspeed, which has about 10,000 merchants in its network, shows hospitality spending collapsed last month. Bar spending was down 15.2%, cafes down 6.2% and restaurants fell 8.2%.
Last month, credit card spending in Victoria and NSW also fell compared with the same period 2019, the last prepandemic year, according to Commonwealth Bank of Australia data.
So far, the recession has not slowed the Australian obsession with buying property, with little effect on mortgage repayments, according to ratings agency S&P.
But in a note to clients, S&P warns that the lockdowns in NSW and Victoria “will crimp economic activity, with many businesses shuttered”. It says self-employed borrowers are most likely to face difficulty paying the mortgage.
“Self-employed borrowers in affected areas and industries are more sensitive to cashflow pressures caused by loss of income compared with fulltime, pay-as-you-go employees, who can continue to work remotely with minimal effect on household income,” S&P says.
Aird says we should not be fooled by the inevitable bounce back into the black when it comes in December.
“If you measure things in growth rates, then they’ll look good because you’re coming off a low base, therefore the only way is up,” he says.
“But really, you want to be looking at things from a levels perspective and say: what is the level of activity in the economy and the level of employment, relative to what we had two months ago when it was kind of the best of what we had post Covid until Delta arrived?
“And I think it takes us quite a bit of time to get back to that level, because Covid, because the virus, ends up everywhere.”
At the moment workers and businesses in lockdown are getting money from the federal government as emergency payments. But one big difference between the current system and jobkeeper is that jobkeeper kept pumping money into the economy as it reopened.
Unless Frydenberg and his prime minister, Scott Morrison, perform an abrupt policy reversal, the emergency payments will automatically cut off as lockdowns lift.
Aird points out that, even under the national plan, which calls for lockdowns to be rare once 80% of over-16s are vaccinated, there will still be restrictions that crimp trade.
“So we kind of don’t know what degree of support businesses will need through that process, but I would suggest they’re going to need some support,” he says. “I just don’t see workers overnight going back in masses into the CBDs again.
“So all those businesses there that are on life support, they’re going to need some support to keep going if they’re not going to fold.”
Hunter says the disaster payments are definitely softening the blow on business, but the picture is murky.
“One area that we will be watching very closely is how quickly firms are able to bring back their employees once restrictions ease, given that the link between workers and businesses is weaker this time round,” she says.
“We’ve seen in other countries that there has been significant dislocation in labour markets which has hampered the recovery.
“Given how long the lockdowns are set to last, the need for everyone to adjust to a new Covid-normal, and the fact that for some businesses they won’t be able to reopen straight away – which will increase the risk of workers and firms becoming detached – it’s likely that the recovery path will be bumpier this time round.”