Recession ‘will not be avoided’ even with the JobKeeper stimulus, say economists

The government will be required to spend billions more and still won’t be able to avoid a recession, economists say.

Trade workers seen having lunch at Martin Place in Sydney, Tuesday, March 24, 2020. Picture: AAP

Australia’s unprecedented fiscal response to the coronavirus pandemic will need to be increased further to avert the risk of prolonged lockdowns causing a depression, leading economists have said.

While welcoming the federal government’s $130bn JobKeeper business wage subsidy policy as necessary to underpin confidence, UBS Australia chief economist George Tharenou warned that the unemployment rate will still more than double to 10.5 per cent “within months”.

“Given more recent restrictions, we still forecast 2020 real GDP to slump 6.1 per cent year on year, driven by the June quarter falling sharply to minus 10 per cent quarter on quarter and minus 10.4 per cent on year,” Mr Tharenou added. “This is worse than any quarter during prior depressions.”

Mr Tharenou argued that the current situation indicated prior downturns – driven by demand and or financial shocks or wars “aren’t comparable” because the current pandemic is “unprecedented” because the supply-side of most of the economy has been shut to combat a health crisis.

“Looking forward, we assume the ‘flattening curve’ of new COVID-19 cases allows some easing of restrictions from late-June quarter onwards, and hence a sharp rebound from the September quarter onwards,” he said. “But the risk is a longer health crisis necessitates a more prolonged economic hit – as in a depression – lifting unemployment very far above our assumed 10.5 per cent.”

Morgan Stanley Australia chief economist Chris Read said that while the JobKeeper policy improves the outlook for a recovery once the virus-related disruption eases, a “recession will not be avoided”.

While the policy might improve the official unemployment numbers, because stood-down workers will be paid, “this is largely a statistical quirk”. Other measures will still deteriorate sharply in his view.

“Looking ahead, we expect more measures from the government – particularly for rental assistance that is a key area not yet addressed,” said Morgan Stanley’s Mr Read.

UBS’s Mr Tharenou noted that the JobKeeper subsidy materially raises the total government (federal and state) fiscal stimulus, so far, to about $206bn, or 10.3 per cent 2019 GDP.

“Of this, about $71bn is in the June quarter alone, equivalent to an extraordinary 14 per cent of quarterly GDP,” he said. “In addition, the authorities also created credit support and guarantees of $125bn, or 6.3 per cent of GDP. Together, these measures total $331bn, or 17 per cent of GDP. “

While total government debt will rise to about $1 trillion, or 48 per cent of GDP, he said fiscal measures are likely to increase ahead as the government has vowed to “do what it takes”, and “provide updates on further business cashflow support in coming days”.

AMP Capital senior economist Diana Mousina said that while global monetary and fiscal stimulus so far won’t help to get consumers spending while they are in lockdown, it “will help the global economy from falling into a depression”.

“It will also help sharemarket returns that have fallen significantly since their peaks in January,” she said. “However, more signs of progress in controlling the spread of coronavirus infections will be necessary for sharemarkets to recover.”

Despite some good news recently, the daily change in infections easing in Europe – especially in Italy – over recent days, she warned that US infections are still rising at a fast pace and need to be watched.