ECONOMIC ISSUES

The COVID-19 Recession

Insights

What Has Happened?

On the 3rd of June 2020, Treasurer Josh Frydenberg announced that in light of Australia experiencing negative economic growth in the March quarter as per the 0.3% fall, predictions for the figures of the following quarter and advice provided by the Australian Treasury department, Australia was officially in recession. The June quarter came and went, and its figures aligned with this announcement with a growth rate of -7%.

Whilst the main catalyst of this economic climate may be COVID-19, it is important to note that prior to the pandemic, particularly in 2019, the Australian economy was already in a state that warranted discussion involving the possibility of secular stagnation, which occurs when there is zero or minimal economic growth, and even a recession.

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Aggregate Demand

The lockdown restrictions implemented in response to COVID-19 across the country have reduced the ability for the physical and thus traditional form of consumption to be undertaken, placing downward pressure on the consumption component of the aggregate demand function (Y = C + I + G + X – M). Furthermore, as this downward pressure on consumption continues to place downward pressure on growth, households are more inclined to save rather than spend as a precaution to such economically difficult and uncertain times, with this type of spending called ‘precautionary saving’. This is evidenced by the fact that household saving jumped from 5.5% to 19.8% between the March and June quarter alone.

Decrease in Consumption

Moreover, in economies across the globe plunging into recession as they attempt to also navigate the pandemic and having similar consumption-constraining lockdown policies that spill over into imports, demand by foreign countries for exports, including Australian exports, has fallen, decreasing our trade surplus and thus the net trade component of the aggregate demand function.

 

The above factors and their impacts on economic growth were intensified by growth already being extremely slow as per consistently below average growth figures prior to COVID-19.

Fluctuations in Unemployment

Whilst the theoretical impact of a recession on levels of employment lies in falling levels of production and thus use of factors of production including labour increasing cyclical unemployment, the lockdown restrictions accompanying the COVID-19 policy response exacerbated the unemployment situation as need for staff in face-to-face jobs such as retail dropped dramatically. This is reflected in the fact that unemployment pre COVID-19 was approximately 5% whereas the July unemployment rate was 7.5%.

However, as restrictions ease, unemployment is falling as evidenced by the August unemployment rate lowering to 6.8%. Despite this falling unemployment, underemployment remained at 11.2% from July to August.  This underemployment situation not only suggests that individuals are getting work but not actually working as many hours as desired, but is also intensified by underemployment being an issue prior to COVID-19; it emerged from the Global Financial Crisis and was still at the relatively high rate of 8.7% in 2018.

Aggressive Fiscal Response

Extensive expansionary fiscal policy measures have been implemented in response to the recession, a key example being the JobKeeper and JobSeeker policies (check out our article that covers these policies!).

 

However, much of the fiscal policy measures have focused less on the traditional means of expansion and more-so on softening the blow of COVID-19 and its uprooting of normalcy as reflected in free childcare for example.

 

Potential income tax cuts have been the forefront of future fiscal policy debate as the 2020-21 Federal Budget announcement draws near, with the justification that such policy would increase the capacity for individuals to consume and thus support the consumption component. However, some argue that the income tax cuts proposal is skewed toward higher income earners which suggests that the additional funds will be saved rather than spent and thus the budget should be focused on social spending and job creation.

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