Covid and the fall and great rise of our GDP

If we get a vaccine early in 2021, it would blow the roof off the global economy, and yet further supercharge asset markets.

We cannot return to “normal” growth unless and until governments order not just our economy but the global economy out of economic jail. And that is only going to happen when and if we get a vaccine that is effective in an economic as well as a medical context.

The story so far …

In the March quarter the economy essentially went sideways. Due to the bushfires, GDP fell a statistically insignificant 0.3 per cent.

It was almost as if we were all “on hold”, waiting for the virus; just as, coming up for a year later, we are now all waiting for the “Godot vaccine”.

The virus “arrived”. The government — governments, plural, all nine of them — quite literally ordered the economy into recession.

It is important to keep making the point that the virus didn’t sack a single worker, the virus didn’t close a single business.

Thousands of businesses were damaged or destroyed, hundreds of thousands of workers lost their jobs, it seems mostly only temporarily, by government fiat, albeit exercised with the best of intentions and, any objective person would have to conclude, close to world-best outcomes.

In mid-to-late March governments — mostly federal, but also state — and the Reserve Bank embarked on massive and utterly unprecedented support and stimulus.

The single most directly and immediately effective was JobKeeper, which put $35bn into the hands of consumers in the June quarter. The net effect of crushing national lockdown and massive countervailing stimulus was the unprecedented 7 per cent June quarter GDP plunge.

This was also, though, very close to world’s best practice. Among major countries only South Korea did better with a 3.2 per cent drop; while the US plunged 9 per cent and the UK dropped an impressively numbing 20 per cent.

This comment excludes of course China, which was actually on the opening-up economy-boosting path in the June quarter, before anyone else — and which is now playing out in the booming share prices of our big three Pilbara iron ore miners.

We were always going to bounce off that bottom in the September quarter, as the massive stimulus and especially from JobKeeper continued to play into the end of the national lockdown.

As I wrote in September-October, we had been headed for a 4-5 per cent September quarter GDP surge, but Victoria throwing one-quarter of the national economy back into lockdown cut that back to 2-3 per cent. This week the figure printed at 3.3 per cent.

How does that compare with our peers? It was anything but world’s best. The US came back 7.4 per cent and the UK 15.6 per cent in their September quarters.

France and Italy actually made up all their June quarter losses, but they had also had big drops in the March quarter as the virus — and response — hit the northern hemisphere earlier.

At least, we get some sort of benefit out of being so slow to produce our GDP figures — more than two months after the end of a quarter — as it makes for easy comparison, as everyone else’s numbers are already out.

We will have a strong GDP growth figure for the December quarter — due to the “villain” of the September quarter. Precisely because of its delayed emergence from lockdown, Victoria is now supercharging national growth.

The timing also knits neatly with the surge in housing activity off those 2 per cent home loan rates and the seasonal November-December consumer spending binge, itself fuelled by the high savings ratio coming into this period and general pent-up demand.

In my judgment we are headed for a December quarter GDP growth figure of about 4 per cent and I would not be surprised to see it finish higher.

At 4 per cent, the level of activity in the December quarter would be all but back to where it was in the December quarter last year; anything stronger will actually give us some growth over the year.

That shouldn’t really be surprising given the extent of the stimulus. But when I was suggesting September quarter growth would be about 2-3 per cent, Treasury and the RBA were arguing over whether it would be a decimal point or two either side of zero.

They were too pessimistic. That showed up in the way Treasury got the JobSeeker numbers so badly wrong in the October budget. It forecast 2.2 million would still be on JobKeeper this quarter; as Josh Frydenberg admitted the — good-to-great news — figure is actually just 1.5 million.

The RBA is still too pessimistic. We will essentially be back to where we were in aggregate output terms a year ago in this quarter; we should be ahead of it in the March quarter. RBA governor Philip Lowe told the pollies on Thursday we would only get there by the end of next year.

The big question is whether he could turn out to be sort of “right” if we get a replay of 2020 in 2021; and a replay specifically of a (seriously?) negative June quarter.

March and March 31 most specifically has become so utterly pivotal. That’s when JobKeeper ends and not just the 1.5 million jobs being directly subsidised by the taxpayer but indeed all 14 million jobs in the economy and the businesses behind them are “on their own”.

At broadly the same time we will be finding out about the vaccine; and more specifically in the context of these comments, whether the economy can be allowed to function normally.

We will broadly have got back to where we were pre-virus — in aggregate output terms, but with a higher level of unemployment or underemployment. We will have done so, still with major handcuffs on the economy — international tourism, in but also out; and foreign students and indeed basic migration — because of all the stimulus.

But we cannot return to “normal” growth unless and until governments order not just our economy but the global economy out of economic jail. And that is only going to happen when and if we get a vaccine that is effective in an economic as well as a medical context.

If we do get such a vaccine early in 2021, it would blow the roof off the global economy, and yet further supercharge asset markets. Again, because of all that global stimulus.