The idea in a nutshell

  • I think Australia’s GDP could fall 5%-10% over the next year as a result of the Coronavirus.
  • The virus affects the whole economy, not just finance and housing as the GFC did.
  • Looking after the 10% of people who get seriously ill will require war like levels of government spending and resource allocation.
  • We are already seeing the evidence of the thin veneer of civilisation starting to evaporate.
  • And all of this is before secondary effects like what might happen to the housing market.

Current estimates of GDP effects from Coronavirus seem low

In the news, most days, there are forecasts of slowing GDP growth associated with the Coronavirus. They come from reputable agencies such as Westpac and include numbers like a forecast 0.7% GDP decline attributable to the disease.

I don’t have to be nearly as conservative (as Westpac etc) or circumspect about my predictions. I think GDP declines of that sort are WAY OFF. I can see Australian GDP falling 5-10% over the next year and the rest of the world being affected to a similar degree.

Historically, a 5% GDP dip was a big deal

A GDP decline of 5%-10% a big deal. Historically, recessions in my lifetime have reduced GDP by 2-5% in the UK. And let’s be clear, that was BAD. I remember those recessions from when I was a kid and I was not in the labour market at the time.

Below : UK GDP Growth Including Recessions

In the past, the biggest recessions in my lifetime have hit economies like the UK with a 5% GDP decline.
Historically, 5% has been a big recession. Coronavirus could cause a bigger contraction.

Here, in Australia the stock market has fallen 20% from its peak in early 2020, on the Coronavirus news which has been released already.

In the GFC, the stock market fell 40%-50%, which is pretty typical for the total share price correction one might expect to see associated with a recession.

This might cause an interested observer to ask. “What would happen to Australian stocks if the GDP decline was double those experienced then?” Surely, the fall would be larger than 40%-50%.

Why is the Coronavirus different to previous recessions

COVID-19 is different to previous economic effects because:

  • The Coronavirus is a whole economy shock:
    66% of Chinese factories are closed. New car sales are down 70% in China. Global supply chains are already damaged (because a lot of them start in China.) Those numbers are massive and poor economic performance in China will have a disproportionately large effect on Australia because we export more to them.
  • When businesses stop:
    It takes a while for them to restart. As the virus spreads and more people are locked down in Australia, businesses may start to fold. That has a human consequence. From an economic standpoint, when things ‘get back to normal’ it will take a long time for displaced entrepreneurs to spool up new versions of their companies.
  • Working from home will kill productivity:
    Let’s be honest, people aren’t going to work from home nearly as much as they would in an office. Most people look for any excuse not to work. When faced with the end of the world, they are more likely to think of their family than video conferencing.
  • Low skilled temporary workers:
    30% of the economy does not have paid sick leave in Australia. Sco Mo can implore businesses to ‘do the right thing’ by these people but they won’t. In Italy, they’ve had to put mortgage payments on hold to assist people like this. This sizable proportion of the economy simply won’t have money to spend – and many live hand to mouth. Their absence from spending will reduce aggregate demand and place increased strain on government welfare spending.
  • 10% – 20% of people are going to get seriously ill:
    Current containment appears to be focussed on delaying the transmission of the virus in Australia. Medical experts don’t talk in terms of ‘containing’ it, here, anymore. The head of the Australian GPs said 80% of people infected would have mild symptoms. There will be a group – 10% – 20% of people who have very severe symptoms. That will be expensive to treat, scary for those watching and will remove more people from the workforce. I recently had pneumonia and the hospital bill ran in to the thousands.
  • Government response:
    Government spending like $10bn (the highest number I have heard said so far) is a gnat on a $1.4 trillion economy and is unlikely to have a material effect in my view.
  • Consumer confidence:
    All of this will hit consumer confidence which is already at low levels.

Secondary effects – jobs and housing

One of the major effects of a recession is what happens to the job market. There are less jobs around in a recession. People stay unemployed for longer. That’s bad news in Australia.

We are, as a nation, up to our eyes in debt, mostly from housing. It is entirely possible that people will have to sell their house if they lose their job. If you get enough of that, the housing bubble could burst.