The economic rebound in the September quarter confirms the COVID-19 downturn is very different from previous recessions and that recovery can be better than in the past.
The Australian economic bounce-back confirmed by official figures this week underlines that the COVID-19 downturn is very different from previous recessions and recovery can be better than in the past.
Initially, this recession will be deeper. But the lingering effects may be less severe. As we entered the biggest downturn in a century, analysts naturally applied the historic trends of past recessions to plot a long and painful recovery path.
While understandable, that initial pessimism now seems overly gloomy for Australia, although there is still a challenging and uncertain period ahead.
If the virus remains well contained through rigorous testing, contact tracing and isolation of confirmed cases, further widespread shutdowns will be avoided and the economy will be on the road to sustained recovery.
In the early 1990s recession, it took two-and-a-half years for the unemployment rate to drift up from 6 per cent to 11 per cent and then another painstaking eight years for unemployment to slowly ratchet down to the pre-recession level.
Reserve Bank of Australia governor Philip Lowe said this week the economy has "turned the corner" and unemployment is now expected to peak at between 7 and 8 per cent late this year, well short of the dire double-digit jobless rate predicted earlier.
The current jobless rate of 7 per cent – artificially suppressed by the pivotal $100 billion JobKeeper program for people technically employed but not working much – is near its peak.
Prime Minister Scott Morrison said on Thursday that 2 million people and 450,000 businesses had "graduated" from JobKeeper, while JobSeeker unemployment enrolments had moderated.
Hence, long-term scarring to the labour market via entrenched unemployment and the lingering malaise from weak consumer demand, is likely to be more limited than feared.
This time it really may be different.
Usually, recessions are caused by either high inflation or troubles in the banking system. But present conditions are almost the reverse.
For the first time in our history, governments deliberately engineered the temporary shutdown of businesses and economic activity in response to fears about a pandemic.
Pent-up demand from stimulus-fuelled consumers underpinned a 3.3 per cent rebound in economic growth in the September quarter – recovering almost half of the massive 7 per cent contraction in the June quarter.
Most remarkably that was achieved as one quarter of the national economy, Victoria, was in a hard lockdown.
Notably, most countries achieved a better than expected economic rebound in the September quarter, but that is now being undermined by major virus outbreaks and renewed lockdowns in Europe in the December quarter.
With COVID-19 seemingly under control in Australia, the economic data is repeatedly surprising on the upside – including retail spending, the surging iron ore export price, house prices, housing construction, consumer sentiment and business confidence.
Unprecedented and rapid fiscal and monetary support by governments and the RBA is underwriting the recovery, including jobs.
University of Melbourne labour market economist Jeff Borland says: "The critical question is how much of the increase in employment has come from government policy – and hence how important continued stimulus will be to ongoing recovery."
Rather than the usual slow crawl out of a boom-bust inflation recession or banking crisis, large sections of the economy are well positioned to spring back – except for hard-hit sectors such as universities and some tourist locations hurt by international border closures.
Unlike during the Great Depression of the 1930s, the local 1991 recession and the 2008 global financial crisis, banks are in good health.
So rather than crippled banks weighing on the recovery and denying good businesses credit, well-capitalised banks are strongly positioned to keep credit flowing to aid the recovery.
Their strong balance sheets enabled them to grant $276 billion in loan deferrals for at least six months to tide over struggling households and small businesses – 68 per cent of which are now being repaid.
"The financial sector globally is able to support the recovery, whereas it was fairly close to being the cause of the issues last time around," RBA deputy governor Guy Debelle told a parliamentary committee this week, referring to the 2008 global financial crisis.
Moreover, instead of inflation running out of control like in the recessions of the 1970s, '80s and '90s, and the central bank crunching the economy through higher interest rates, this time around weak inflation means the RBA was able to rapidly loosen monetary policy.
Unprecedented debt-fuelled fiscal stimulus of more than $200 billion and unorthodox monetary policy support has kept many households and businesses afloat during virus-related shutdowns.
In an extreme paradox during a recession, household income and business profits have risen for two straight quarters due to the massive government handouts.
Federal and state government spending and tax relief has expanded by an extraordinary 15 per cent of GDP – approaching wartime proportions.
The big jump in federal and state government debt levels should not be ignored, but with record-low interest rates, the economy can gradually grow its way out of the debt so long as borrowing costs stay low and the spending is temporary.
Moreover, the policy responses have been swifter and better targeted than in past recessions. Policymakers have benefited from the knowledge of what has and hasn't worked in the past.
Following the Wall Street crash of 1929, the US Federal Reserve mistakenly maintained tight monetary policy, allowed banks to fail and tightened credit conditions, exacerbating the severe downturn.
The 1990s recession incorporated high inflation, 19 per cent mortgage rates, an asset price bubble in commercial real estate markets and the near-death experience of Westpac and ANZ, which lent too much money to risky property projects and giddy tycoons. And fiscal policy was too late to the party to support a ravaged economy. A large portion of Paul Keating's One Nation stimulus came years too late, largely because it took too long to roll out infrastructure projects.
Former Treasury secretary Ken Henry once calculated that the Keating stimulus peaked around 1996, more than three years after the recession had passed and when the RBA was already lifting interest rates to cool inflation.
That is why the Rudd government in 2008 followed Henry's advice to "go hard, go early, go households" as part of its $52 billion stimulus packages that included cash handouts, housing grants, home insulation and smaller-scale infrastructure projects.
Morrison and Treasurer Josh Frydenberg refined that approach, to deliver a "temporary and targeted" stimulus to households and business largely delivered through the existing tax and welfare system.
That meant money could be quickly deployed and avoided the implementation problems that bedevilled Labor's pink batts and school halls which were being rolled out after the recession passed when the China stimulus was already flowing and after the RBA was raising interest rates.
The RBA is urging the Morrison government to learn from the global financial crisis and not withdraw stimulus too early. That's what happened in Europe, which experienced a double-dip recession.
Debelle told Parliament this week: "Don't remove the stimulus too early."
"Remove your stimulus at the appropriate pace, is obviously a very tautological and possibly somewhat vacuous statement to make, but I do think that it is actually worth thinking about what is the appropriate level of stimulus."
If the economic rebound can be sustained as government support winds down next year and a vaccine is rolled out, a stronger than anticipated baton change to private-sector-led growth awaits in 2021.