COVID-19 and GFC: a tale of two crises
As the COVID-19 crisis unfolds, the economic implications are deepening. Disturbing reports of rising unemployment have sadly become commonplace in recent weeks.
A recurring observation by economists and officials is that the COVID-19 crisis has different economic implications than the global financial crisis (GFC). But what does that really mean?
As many of us know, the GFC began with the collapse of the US housing market. As the crisis escalated, households attempted to bring down their own levels of debt. This decline in household spending saw US economic activity grind to a halt as demand for goods and overall spending by the community sharply declined. Remember: one person’s spending is another’s income.
What started as a ripple ultimately turned into a tsunami that rolled across the entire globe.
We are facing another global economic shock spurred by COVID-19 – but the nature of this crisis differs from the GFC in two important areas.
First, the global economy is absorbing this shock from a less than robust base because many countries and households are still recovering from the GFC hit in 2007-08. That includes Australia as evidenced through the country’s persistent underemployment, job insecurity, rising wealth inequality and stagnant household consumption. More startling is that many countries within the Eurozone, including in Greece, Spain, Portugal and Italy, have not recovered from the GFC at all.
The second point of difference is that, through COVID-19, the global economy is feeling the combined effects of shocks to both supply and demand. By contrast, the GFC was primarily a ‘demand’ shock. Households and industry pulled back on consumption, and the economy suffered as a result.
Under COVID-19, demand for some goods is thriving to the point where supply cannot keep pace – think medical supplies and basic household items (toilet paper, cleaning products, pasta, etc.). Compounding this supply shock is that production worldwide has slowed significantly as a result of lock-downs of whole regions and countries – the World Trade Organisation has estimated that global trade flows will contract by 32%. (Source)
Unsurprisingly, economic uncertainty means that most people are also holding back their spending on ‘non-essential’ items until we are in safer waters. So, on the flipside of the supply shock, we are facing a reduction in demand for many goods and services, and that demand is what keeps the economy strong. Notably, history tells us that austerity does not work as a response – failing both during the Great Depression and in the aftermath of the GFC. While an inclination to sharply pull in our belts is understandable, it spells a potential increase in the duration and intensity of economic pain.
The swing of the pendulum between these supply and demand shocks needs to be balanced as quickly as possible to recalibrate the continuum and minimise the economic hit. That is what governments are working feverishly to address. The challenge is to fill the gap in aggregate spending and generate confidence to encourage broader, more sustained economic activity.
Our saving grace will be for the Federal Government to spend, and spend big for a prolonged period.
The Federal Government’s recent stimulus packages are a strong step in that direction, but will it be enough? The Rudd government injected around $40 billion in its initial response to the GFC. Given the current state of the Australian economy – with 50% of Australian businesses already reporting adverse impacts during March (Source) – a direct fiscal response is imperative, and that is what we are seeing, including this week’s welcome instalment of a $130 billion wage subsidy.
In designing and implementing the stimulus, a first priority has been a sugar hit through large cash injections to households and tax relief for businesses. Although both are helpful, such measures will only be effective if these dollars are channelled back into the economy through spending rather than pocketed to safeguard against an uncertain future. Our economy will only thrive when firms are hiring staff and investing in new assets. But hiring and buying will not occur without direct, sustained cash flow support to households over the longer term, as it is household demand for goods and services that underpins strong economic activity.
Admittedly, we are only at the start of this economic crisis, and the playbook is unwritten. Balancing the budget as the prevailing mantra has been parked for now as the Government throws as much as possible toward keeping the economy moving.
Yes, the path ahead is unknown. One certainty is that the effects of prolonged lock-downs will continue to reverberate across every home and business for months – and possibly years – to come. This recast future compels governments and indeed all sectors to rethink their approaches to sustainable economic management and growth.
George Pantelopoulos, Researcher, HRF Centre
11 April 2020
ECONOMIC UPDATE: The impact of COVID-19 on key sectors in the Hunter region.
With rolling shut downs being announced by state and federal governments, any business providing services or goods in-situ is now highly vulnerable to losing their customer base, cash-flow and ability to operate.
These kinds of jobs largely, but not exclusively, fall into three industries: retail trade, food and accommodation services, and arts and recreation services. They are some of the Hunter region’s largest employing industries, together representing around 62,000 people, or almost one in five jobs (18 per cent) in the region.
- Retail trade: the Hunter’s third largest industry employs 31,600 people
- Accommodation and food services: the region’s fourth largest employer, employs 26,500 persons
- Arts and recreation services employs a further 3,500 people.
Given the size of these sectors, we can quickly start to see the significant economic impact already taking effect from necessary measures to battle the spread of COVID-19. In December 2019, 16,000 people were unemployed in the Hunter region, a fraction of the 62,000 people employed in the above sectors.
Even if one-third of the jobs in the three most impacted sectors are lost, the unemployment rate in the Hunter could go up to 10 per cent. That is more than double the unemployment rate of 4.5 per cent that the Hunter Research Foundation Centre reported last month.
By way of comparison, at the height of the wind-back in mining investment, the region’s unemployment peaked at 10.3 per cent in March 2015. When BHP closed in the late 1990s, the unemployment rate peaked in 1999 at 12 per cent.
Many of the workers in these industries are young. Nationally, almost half of the workers in the three identified sectors are under 30 years old, and 18 per cent are under 20 years old. Even in ordinary times, younger workers generally face double the unemployment rate of Hunter residents overall. Job losses can be particularly challenging for a group that struggles to find a foothold in the labour market and to sustain employment.
Nationally, it is important to note that 55 per cent of workers in these three sectors are female.
Income lost for these workers in moving from paid work to Newstart can be determined based on national average weekly earnings by industry. If a single person with no children was to rely solely on current income support from the government ($557.50/week), they would face a weekly wage loss of $255.50 per week (not including the one-off $750 Economic Support Payment) if they were previously employed in retail trade, for example.
Income disparities for families moving from paid work to Newstart are likely to be larger and more detrimental. When we consider that median rent for 2-bedroom house in Newcastle is $390 per week, we can see that rental stress and rent-arrears are likely to jump without income assistance or a ‘holiday’ on rental payments, which some are discussing.
In addition, lower wages of these workers will lead to a decrease in overall spending in the economy. And as one individual’s spending is another’s income, there is a flow-on effect to other businesses and industries. Hence, the income and job losses experienced most immediately by those who lost their job this week will be followed by what will likely be larger income losses across the entire economy.
More broadly, job losses and market fluctuations witnessed over the globe will play a role in investor confidence and the valuation of assets. Such movements may already be seeing lower activity and prices in the housing and construction sector, which has been softening over much of 2019. This decline flows on to a number of associated industries within the Hunter.
At this early stage in the crisis for our region, we are starting to see the impact of those sectors that will be hardest hit. Special attention needs to be paid to the potentially disproportionate effect on younger workers, both for their welfare and the possible flow-on effects to other sectors of the economy.
Dr Anthea Bill, Lead Economist, HRF Centre
1 April 2020