Recession fears grow, but does it matter?

By Cameron Micallef

July 27 2021
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Leading economists suggest COVID-19 lockdowns in Sydney and Melbourne will put the economy back into a recession, but given how quickly Australia recovered last time, could it all just be ‘semantics’?

Having escaped a technical recession for just short of three decades, Australia is now in the unusual position of having had two recessions in the space of just 18 months.

Economists define a recession as two negative growth quarters in a row, albeit the impacts on society differ pending how long the recession lasts.

With Australia’s two largest cities in lockdown, NAB’s senior economist, Gareth Spence, told nestegg that Australia will have its first negative quarter of GDP growth in September, predicting a fall of between 2 and 2.5 per cent.

“The biggest hit to the economy will come through household consumption, mostly with services although goods might also fall as well given the extent of lockdowns,” he said.

Should the lockdowns continue into early September, then the country faces the real possibility of back-to-back negative quarters, Mr Spence believes.

“What we know is once we remove the restrictions, activity tends to come back,” he said.

“So, as long as we don’t really have the scarring, which was the worry last but didn’t eventuate, we think it will rebound.”

“But this is the assumption the rebound ends by the end of September,” he said.

AMP Capital’s Dr Shane Oliver agreed, telling nestegg that the country’s economic output will greatly depend on how quickly Sydney opens back up.

When asked if lockdowns extending into September will push Australia into a recession, the economist told nestegg “it’s a risk, but providing the NSW lockdown ends then and other states continue to have only short lockdowns, then a December quarter contraction should be avoided”.

Does falling into a recession technically matter?

Given the pace of the recovery last time and pent-up demand associated with lockdowns, economists are predicting that if the economy falls, the fall will be short-lived.

According to Dr Oliver, whether or not Australia falls into a recession or not is just “semantics”.

“It’s very different from a normal cyclical recession that takes longer to recover from. The experience from past lockdowns is that provided the damage to jobs and incomes is minimised, then the bounceback is strong, and we will then be back to talking about recovery and whether things are too strong or not,” he said.

Mr Spence agreed with Dr Oliver, albeit pointing out the consequences of scarring on the economy.

Economic scarring refers to the medium-long term damage done to the economy following an economic shock that leads to an economic downturn and eventually a recession.

“Not really, it doesn’t matter. It is a technical definition of two negative quarters, we have to have something to define it as,” he said.

“But people think about it more broadly in terms of the wider impacts like unemployment and the duration,”

“So, I think we will avoid the strict two negative quarters unless something happens in the June quarter we didn’t factor in, but we will see a little bit of deterioration in the labour market.

“As such, I wouldn’t call it a typical double-dip recession,” Mr Spence said.

Looking forward

While stronger economic growth is believed to be on the horizon, likely as soon as December and March quarters, the economist is worried about the labour market.

“We think unemployment will lift a little bit in the short term, but the bigger hit will come in hours worked, which we saw evidence of in Victoria in May and June,” he said.

“I guess offsetting much of this is the tightness of the labour market, meaning employers might try to hold onto their employees given they know they will struggle to get them back in a rebound,” Mr Spence concluded.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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