Shortcuts / 21 April 2020
Let’s face it, talking about economics can be as exciting as watching paint dry. The good news is once you get your head around some basic concepts, it’s a lot easier – and shock horror – very interesting. So in this episode we’ll take you through some fundamentals including what a recession looks like. And we’ll talk about what governments can do.
In a nutshell, how does Australia’s economy work?
Australia has a developed market economy. What that means is we have stable and functioning financial institutions and corporate sector delivering sustained periods of economic growth. There’s a high level of regulation and oversight, and we have strong markets and competition. We export a lot of goods and services, and we support free trade principles as a way of engaging with world markets. The Australian economy is dominated by the services sector, which accounts for more than 70% of our gross domestic product (GDP) – which is basically code for all the economic activity that happens – and it employs four out of every five Australians. So that includes things like professional services, education and tourism, financial services and hospitality. Last year, Australia’s GDP – so all our economic activity – totalled A$1.89 trillion. And GDP is measured quarterly by the Bureau of Statistics, and for almost 30 years, it’s been growing quarter on quarter. We’re the world record holders in that regard. But it only takes two negative quarters – so 6 consecutive months where our economy contracts – for a technical recession to be declared.
The last time Australia slid backwards was around 30 years ago, after global stock markets crashed in 1987, which led to an economic downturn and eventually a recession in Australia from 1990-91. What brought about that recession?
It was a very different set of circumstances than what we’re facing today. But back then, the economy was very stretched and the fall in asset prices that meant that loans could not be repaid, with put a lot of stress on our banks. And that saw GDP fall by 1.7%, the unemployment rate rose to 10.8%, inflation was high and there were interest rates of 17%. Another recent period to mention is the Global Financial Crisis which hit in earnest in 2009. During that period our national economy continued to grow due to our strong mining sector. But if you weren’t involved in mining, you experienced a kind of recession.
So what’s happening with our economy during the COVID-19 pandemic?
Leading into the start of 2020, Australia’s economy was doing very well on some measures, and not so well in others. We have had a sustained period of low unemployment and solid job creation, which is terrific. But there’s been weakness in out economy that means our growth rate has stayed lower than the government and Reserve Bank would like. That’s was being driven by low consumer spending and consumption, low wages growth, and low inflation. Despite some underperformance there, the Morrison Government was getting ready to celebrate returning the government budget to a surplus for the first time since John Howard left office in 2007. But the coronavirus crisis has ended all that.
What can the federal government do when the economy is under threat?
Part of being a developed economy means that one of our government’s main roles is to create and maintain the best economic environment possible so businesses can thrive and workers have opportunities. They can do this through tax reform, through big infrastructure programs, and by forging trade deals with other nations so we can sell our goods and services overseas, as just a few examples. But they also have a big role to play when a storm sets in. The first line of defence is to throw money at the problem. Government’s can do that with a stimulus package. And what that does is to stimulate the economy and prevent or reverse a recession by boosting employment and spending by putting cash directly into the hands of business or individuals. There’s also industry bailouts, but these can be a bit more tricky and governments are often accused of being political if they choose to put cash or other financial support into individual companies or sectors to keep them going. But sometimes governments say that’s what they need to do because the industry is a special one, or crucial to the functioning of our economy or country, such as airlines or child care.
The Reserve Bank sits at the centre of our financial system, and it also has an important role to play. For example, it sets interest rates and lowering those can be a tool to making investing and borrowing more attractive as a means to stimulate economic activity. Low interest rates mean more money in your pocket to go out and buy things. But there’s also what’s called quantitative easing – something this coronavirus crisis has prompted the RBA to do for the first time. Analysts knew things were super serious when the RBA announced it was going down this path in early March. Basically it’s when a central bank purchases of assets from the private sector – usually government bonds, and it pays for those assets by creating central bank reserves.” It’s a pretty drastic measure, and some say it’s the equivalent of printing money.
Another measure that governments can use to protect the economy is to widen the welfare safety net to support people whose financial situation has changed, which in this case is the government’s JobSeeker and JobKeeper payments. This is another big ticket item for governments looking to support people who find themselves unemployed or working less hours.
What does an economic recovery look like after COVID-19?
There’s a couple of schools of thought about what will happen when the health emergency has passed and we’ve found a way to deal with the virus, fingers crossed, a vaccine. The first is that because the fundamentals of the economy were strong when this happened, we’ve hit a pause button and we should largely be able to pick up where we left off. PM Scott Morrison and Josh Frydenberg have talked a lot about support for businesses to go into a kind of hibernation so they are able to get back to things when the health crisis is over. But some analysts say the downturn will last longer than we might think. One thing we do know for sure is the government – and taxpayers – will have one hell of a debt to pay off. But what the government has said is it has no choice but to go hard to help businesses and individuals survive this and we will be paying for it for years to come.
The Labor in Power series documented the Hawke and Keating years. This episode on the economic downturn in the late 80s and early 90s is a good one.
Get the Squiz Today newsletter
It's a quick read and doesn't take itself too seriously. Get on it.