COVID-19 has affected economies more quickly than any event in recent memory, surpassing even the crisis of 2008. Its devastating impact on the global economy has not spared Australia. This is a challenging time for everyone, including economists. I’ll break it down into several parts to try and understand what is happening today.

COVID-19 and Its Spread

It seems to show that the spread of the virus in China has been contained; the log scale has been flat for nearly three weeks. Everywhere else, infections are in an exponential phase. The exception is Italy, which was the first Western country to experience it.

In Australia, there are approximately 260 cases per million [Editor’s note: This number was updated on 4/16/2020] – quite low by international standards. The Australian government claims it has tested a higher proportion of its population than has almost any other country of its population, except for South Korea, which was quick to roll out a wide-ranging testing program.

So far, the measures adopted in Australia, combined with our relative isolation from the major centers of serious outbreaks, have potentially helped reduce the rate of infection. It’s also striking that the death rate has been very low in Australia.

In most other countries, the death rate is upwards of 2%: 2.4% in the UK, 4% in China, 8% in the UK, 9% in Spain, and almost 12% in Italy. Perhaps one of the reasons people are becoming increasingly skeptical of China’s numbers is that it’s recording only 57 confirmed cases per 1 million people. And, again, the death rate in China is about 4%. It’s obviously much harder to mistake the number of deaths than it is the number of cases.

Financial Shocks

Many parallels have been drawn between the current situation and the 2008 financial crisis in terms of the depth of the downturn we face. Apart from its purely financial dimensions, the crisis was like most other recessions and even to a very significant extent much like the Great Depression of the 1930s. It was a shock to demand; businesses and household capacity and willingness to spend was severely impacted. We’re certainly seeing this in the present episode.

But there’s an important supply-side dimension to our current situation, particularly regarding labor supply, which is restricted by government social distancing regulations, and – though we’re lacking perfect data – the supply of goods, raw materials, and essential items, like medicines and masks. Monetary and fiscal policy measures usually address demand, but it’s difficult for traditional policy instruments to respond to the supply shock that economies are now experiencing around the world.

Everyone’s expense is someone else’s income, and everyone’s income is someone else’s expense. When governments minimize the expenses that employers and businesses pay to remain in business, they’re automatically cutting someone else’s income. So it’s a complex set of arrangements.

Economic Impact

The data we currently have points to a much deeper downturn in most economies than the one experienced during the financial crisis. Most purchasing managers’ readings, especially for Asia and Europe, have shown bigger declines than what occurred in 2008. The difference here is the services-producing sectors have been much harder hit than manufacturing sectors. That reflects the fact that most services require physical encounters between producer and consumer that don’t usually occur when we’re talking about transactions and goods.

This underscores another important dimension: The services sector is much more labor-intensive, so the employment consequences are bound to be more severe than if the crisis affected mostly goods-producing markets. And in many cases, the loss of services output is permanent, whereas regarding discretionary goods, consumer goods, and the like, some of the unmet demand that happens during the shutdown can be recouped when restrictions are lifted (when there is pent-up demand).

It’s difficult what to make about which industries and what proportion of different sectors are shut down and how long that will last. To some extent, we can follow what the prime minister has said about the shutdown lasting six months. If that’s true, industries that are shut down may essentially remain that way until the end of September.

What does this look like? Some accommodation will remain open for those forced into quarantine. Restaurants are offering takeaway services, for example. So, it’s not a 100% shutdown. Segments like art, recreation, and other personal services will likely contract by more than 50%. I think retail will contract by at least 45%, bearing in mind that supermarkets, food stores, and pharmacies – which account for about 40% of retail – will likely remain open.

Wholesale trade and construction will both decline by about 25%, manufacturing will likely decline by about 19%, and business and professional services will continue to remain open. For example, there probably won’t be much of a decline in the financial sector, at least in terms of output. The mining sector so far appears relatively unscathed. Similarly, I wouldn’t expect the agricultural sectors to be significantly affected.

Unemployment

The current numbers portend a decline in employment, which is equivalent to almost 800,000 Australians currently employed becoming unemployed or dropping out of the workforce.

To be counted as unemployed, you must have been willing and able to work and have actively sought work, which is defined in various ways such as contacting employers and attending job interviews. Most people won’t to be able to do that and may conclude there’s not much point in looking for work when so many people are losing their jobs. Depending on how people respond to that question, the unemployment rate could be a misleading indicator of the true extent of unemployment in Australia as it may well be in other countries.

If everyone who loses a job because of the shutdown says they’re unemployed and looking for work, then the unemployment rate could still get to 11%, notwithstanding the impact of the government’s wage subsidy package. The unemployment rate could get to 8% or 9%, but that would still conceal a fair bit of hidden unemployment as well as a significant amount of underemployment (people who – in part, thanks to the government’s wage subsidy – are still counted as being employed but are not working as many hours as they want or did previously).

Policy

Australia has budgeted almost $200 billion against the coronavirus crisis; considering the most recent announcements of free childcare and additional health system support, that’s equivalent to about 10% of GDP. That puts Australia’s policy response in an area similar to what most other large Western economies are doing. It may have to extend some of the announced missions if the shutdown continues past September, but if you look at other countries, it’s not obvious now that there are things they’re doing that the Australian government should also do.

At this point, the government’s actions are reasonably well targeted and commensurate to the depths of the problems. That said, $200 billion doesn’t represent the total damage to public finances. My rough guess is that over the next two fiscal years, the government will lose close to $100 billion in uncollected revenue.

If you add $300 billion to the forecasts in the most recent media, economic, and fiscal outlook for net debt, that figure nears 33% of GDP for federal government debt; if you include state debt, you’re looking at something like 45% of GDP. That’s a high figure by contemporary Australian standards.

Pre-crisis, the average net-debt-to-GDP ratio for advanced economy governments participating in the G20 was about 83%. That figure will probably now exceed 100%. The prime minister is likely right correct to express the concern that this could potentially send other countries into a serious public financial crisis, but Australia probably won’t be one of them.

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About Saul Eslake

Saul Eslake is one of Australia’s most prominent and experienced business economists with over 30 years’ experience in the Australian financial markets. He currently runs his own independent economics advisory and consulting business in Tasmania (Corinna Economic Advisory Pty Ltd). Since April 2016, Saul has also had a ‘‘fractional appointment’’ as a Vice-Chancellor’s Fellow at the University of Tasmania. From December 2011 until June 2015, Saul was Chief Economist, Australia at New Zealand and Bank of America Merrill Lynch, one of the world’s largest investment banks.

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This article is adapted from the April 3, 2020, GLG teleconference “COVID-19: Assessing the Economic Impact on Australia.” If you would like access to this teleconference or would like to speak with Saul Eslake or any of our more than 700,000 experts, contact us.