When we entered lockdown in March this year, many people (including me) pooh-poohed Scott Morrison’s assurance that the economy would “snap back” once the lockdown was lifted. Turned out he was more right than wrong. Question is, why?
Two reasons. But first let’s recap the facts. About 85 per cent of the jobs lost in April and May had been recovered by November, with more likely this month. It’s a similar story when you look at the rebound in total hours worked per month (thereby taking account of underemployment).
In consequence, the rate of unemployment is expected to peak at 7.5 per cent – way lower than the plateaus of 10 per cent after the recession of the early 1980s and 11 per cent after the recession of the early 1990s. And the new peak is expected in the next three months.
At this stage, the unemployment rate is expected to be back down to where it was before the recession in four years. If you think that’s a terribly long time, it is. But it’s a lot better than the six years it took in the ’80s, and the 10 years in the ’90s.
We’ve spent most of this year telling ourselves we’re in the worst recession since World War II. Turns out that’s true only in the recession’s depth. Never before has real gross domestic product contracted by anything like as much as 7 per cent – and in just one quarter, to boot.
But one lesson we’ve learnt this year is that, with recessions, what matters most is not depth, but duration. Normally, of course, the greater depth would add to the duration. But this is anything but a normal recession. And, in this case, it’s the other way round: the greater depth has been associated with shorter duration.
Of course, the expectation that this recession will take just four years to get unemployment back to where it was is just a forecast. It may well be wrong. But what we do have in the can is that, just six months after 870,000 people lost their jobs, 85 per cent of them were back in work. Amazing.
So why has the economy snapped back in a way few thought possible? First, because this debt-and-deficit obsessed government, which would never even utter the swearword “Keynes” - whom the Brits raised to the peerage for his troubles - swallowed its misconceptions and responded to the lockdown with massive fiscal (budgetary) stimulus.
The multi-year direct fiscal stimulus of $257 billion (plus more in the budget update) is equivalent to 13 per cent of GDP in 2019-20. This compares with $72 billion fiscal stimulus (6 per cent of GDP) applied in response to the global financial crisis – most of which the Liberals bitterly opposed.
Some see Morrison’s about-face on the question of fiscal stimulus as a sign of his barefaced pragmatism and lack of commitment to principle. Not quite. A better “learning” from this development is that conservative parties can afford the luxury of smaller-government-motivated opposition to using budgets (rather than interest rates) to revive economies only while in opposition, never when in government.
At the heart of Morrison’s massive stimulus were two new, hugely influential, hugely expensive and hugely Keynesian temporary “automatic budgetary stabilisers” - the JobKeeper wage subsidy and the supplement to JobSeeker unemployment benefits.
But the second reason the rebound is stronger than expected is that, while acknowledging the coronacession’s uniqueness, economists (and I) have been too prone to using past, more conventional recessions as the “anchor” for their predictions about how the coronacession will proceed.
We’ve forgotten that, whereas our past recessions were caused by the overuse of high interest rates to slowly kill off a boom in demand over a year or more, the coronacession is a supply shock – where the government suddenly orders businesses (from overseas airlines to the local caff) to cease trading immediately and until further notice, and orders all households to leave their homes as little as possible.
It’s this unprecedented supply-side element that means economists should never have used past ordinary demand-side recessions as their anchor for predicting the coronacession’s length and severity.
Whereas normal recessions are economies doing what comes naturally after the authorities hit the brakes too hard, the coronacession is an unnatural act, something that happened instantly after the flick of a government switch.
Morrison believed that, as soon as the government decided to flick the switch back to on, the economy would snap back to where it was. Thanks to his massive fiscal stimulus and other measures – which were specifically designed to stop the economy from unwinding while it was in limbo – his expectation was 85 per cent right.
But there’s a further “learning” to be had from all this. In a normal recession, a recovery is just a recovery. Once it’s started, we can expect it to continue until the job’s done, unless the government does something silly.
But this coronacession is one of a kind. What we’ve had so far is not the start of a normal recovery, but a rebound following the flick of the lockdown switch back to “on”. It has a bit further to run, with the leap in the household saving rate showing that a fair bit of the lockdown’s stimulus is yet to be spent.
Sometime next year, however, the stimulus will stop stimulating demand. Only then will we know whether the rebound has turned into a normal recovery. With wage growth still so weak, I’m not confident it will.
