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COVID-19 vaccination go-slow risks a double-dip recession

·5-min read
The vaccine roll out is still slow, policy stimulus is tepid, housing is cooling and population growth has stalled. Prepare for a run of bad economic news. Source: Getty/Yahoo Finance
The vaccine roll out is still slow, policy stimulus is tepid, housing is cooling and population growth has stalled. Prepare for a run of bad economic news. Source: Getty/Yahoo Finance

Up until the end of 2019, Australia went a record 29 years with no recession. It was a proud record that had been presided over by Labor and Coalition governments alike.

Prime Ministers Keating, Howard, Rudd, Gillard, Abbott and Turnbull had all delivered non-stop economic growth and importantly no recession.

This is not the case for Prime Minister Scott Morrison.

While the onset of the COVID-19 pandemic plunged Australia into recession in 2020, the odds are shortening that Morrison and Treasurer Josh Frydenberg will preside over another recession in the second half of 2021.

That is, two recessions in two years.

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The simple reason for a possible second recession is the emergence and spread of COVID-19 in the past month which has seen half of Australia locked down, businesses closed, jobs lost and economic malaise unleashed.

In simple terms, the Morrison government’s unwillingness and inability to procure enough vaccinations means Australia is last in the industrialised world in terms of its vaccination roll-out. As a result, people are vulnerable to COVID-19 and it is spreading around much of Australia unless huge swathes of society are locked down.

Health experts say that if more Australians had been fully vaccinated for COVID-19, the current outbreak would not have been as severe.

A recession is also increasingly likely because the financial support to those hit by the lockdowns has been stingy, tied up in red tape and inadequate.

The financial assistance is not, at this stage, big enough to give sufficient income to businesses and workers to allow them to maintain spending at a sufficient pace to avoid a much weaker economic outlook.

At another level, this time around unlike in 2020, the Reserve Bank cannot provide monetary policy support. The monetary stimulus was a key factor helping with the late 2020 economic recovery and there is no such stimulus in the offing this time around.

The economy will hit a brick (COVID-19) wall

Making this outlook all the more disconcerting was the fact the economy was fantastically strong over the first half of 2021.

The good news is rapidly souring.

Economic growth was remarkably strong, employment growth was at a record pace and the decline in the unemployment rate in just over a year was the sharpest fall ever recorded. At the same time, wages growth was picking up, the housing market was strong, investors were pushing the stock market to record highs and business conditions and consumer sentiment were downright exuberant.

Such was this strength that investors were fulling pricing in the start of an interest rate hiking cycle from the RBA in late 2022, well before the 2024 timeline outlined by the RBA. A rate hike would only be delivered if the economy was strong.

A drop in September quarter GDP

All economists are assessing the economic effects of the current lockdowns. While it is clearly a work in progress event – no one can be sure how long it will last and whether it extends – there is a growing consensus that September quarter GDP growth will be negative.

This seems a fair assessment with half of Australia locked down.

The question for a recession is whether the December quarter GDP will also be negative.

Even on the assumption that the lockdowns end by September, the following December quarter could also be weak.

Housing is topping out and consumers are likely to be cautious about their spending intentions. While there still, for now, is a powerful wealth effect from the rise in house prices and stocks, this can quickly stall.

The export side of the economy is set to taper off. Volumes of resources exports appear to be peaking in line with the slowing in Chinese GDP, which could be further evident in the December quarter.

Government demand is also slowing in terms of a contribution to bottom line GDP. This could see a weak contribution to GDP over the next few quarters.

Importantly, with international borders closed, population growth is likely to remain near zero, meaning a critical lift in economic activity simply because of more people will not be evident in the December quarter.

The unemployment rate could quickly jump towards 6 per cent from the current 4.9 per cent.

Another recession? It will be a close call

Be prepared for a run of bad economic news.

The vaccine roll out is still slow. Policy stimulus is tepid. The international economy is slowing. Housing is showing signs of cooling and population growth has stalled.

Consumer demand and any further government support will be critical. But if consumers hunker down with lost jobs and fewer hours and the government stimulus is inadequate, a drop in September quarter GDP will be all but assured and the weakness will extend into the December quarter.

The September quarter data are released on 1 December, with the December quarter release on 2 March 2022.

In addition to the economic shock of a double-dip recession, if Morrison delays holding the election to any date after March, he will be campaigning with the economy on its knees.

It will be pivotal in the way people vote.

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