The Times Australia
Business and Money
The Times Real Estate

.

COVID-19 recession is different – and we need more stimulus to deal with it.

  • Written by Richard Holden, Professor of Economics, UNSW
COVID-19 recession is different – and we need more stimulus to deal with it.

Australia has done well on the public health front during the COVID-19 pandemic, thanks to decisive action by the National Cabinet in March. Australia has done better than most countries on the economic front, too, thanks to the federal government’s large fiscal measures.

But we are at a crossroads.

By September, we may well have largely dealt with the public health aspects of the pandemic. But the economic recovery will only just be starting. The danger is that misunderstanding the nature of this economic crisis will lead the government to bungle that recovery.

Read more: Eradicating the COVID-19 coronavirus is also the best economic strategy[1]

This recession is not like any recession in living memory.

Those of the 1980s and 1990s were “business cycle” recessions. The economy outpaced its inbuilt speed limit and inflation rose. To curb inflation, central banks pushed up interest rates. Those higher rates ended up choking off investment and spending too much.

The global financial crisis of 2008 was different again. That basically involved a massive dislocation in credit markets due to defaults (or the prospect of defaults) on mortgage debts packaged up and sold as investment products – known as mortgage-backed securities and collateralised debt obligations. When it finally became clear how bad these investments were, global credit markets effectively froze, bringing a range of otherwise healthy companies close to bankruptcy.

COVID-19 Recession

The economic crisis now was caused by a massive supply shock which, in turn, was caused by the virus.

For instance, Sweden’s “self-lockdown” saw economic activity drop 25%[2]. Denmark’s coordinated lockdown resulted in economic activity falling 29%. According to Asger Lau Andersen and colleagues at the University of Copenhagen’s Center for Economic Behaviour and Inequality:

This implies that most of the economic contraction is caused by the virus itself and occurs regardless of whether governments mandate social distancing or not.

This is COVID-19 Recession phase one – a big supply shock while the virus ravages both the community and the economy.

Once the public health crisis has been brought under control, countries will emerge from the supply shock with fractured economies.

Australia will likely be in this position in the next couple of months. Household and company balance sheets will be badly damaged. Consumer and business confidence will be low. Unemployment high. Underemployment higher still. Renters or mortgage holders at greater risk of defaulting on payments.

Read more: The economy in 7 graphs. How a tightening of wallets pushed Australia into recession[3]

This will mark the beginning of COVID-19 Recession phase two.

Supply shocks create demand shocks

In a remarkable paper[4] published in April, economists Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Iván Werning develop a theory of what they call “Keynesian supply shocks”.

Their theory demonstrates how supply shocks can create demand shortages when markets are “incomplete” – which is pretty much all markets, all the time.

The COVID-19 supply shock is the shutting down, directly or indirectly, of industries such as hospitality and tourism. Workers in affected businesses lose their jobs and income. If they were on low incomes – as many workers in food and accommodation services are – their “marginal propensity to consume” (rather than than save their income) would have been high. If you don’t earn much, you don’t save much – you just spend. So their drop in consumption will be large unless they borrow to spend.

This is going to lead to an overall demand shortfall unless the workers who still have jobs and steady incomes start spending a lot more. But people typically won’t want to do that for multiple reasons – including the fact the goods consumers ordinarily spend big on – such as exotic holidays – are still not available.

The policy response

This all suggests policy responses to this economic crisis must be different to past responses.

Phase one has required ameliorating the supply shocks as much as possible.

Arguably the Australian government’s JobSeeker and JobKeeper programs have done that reasonably well – although JobKeeper in particular should have been better designed.

Phase two needs to deal with the demand shortfall that will become more apparent as the supply shocks fade.

That will require more stimulus, not less. Any focus on getting back to a balanced budget – encapsulated by Prime Minister Scott Morrison warning the government can’t save every job [5] and needs to be “extremely cautious about expenditure” – is precisely not what is needed.

Read more: The costs of the shutdown are overestimated -- they're outweighed by its $1 trillion benefit[6]

In times of widespread falls in demand, with monetary policy that can no longer respond, fiscal contraction simply makes the crisis worse.

It’s a lesson learnt long ago by economists of all stripes, and immortalised by former US Federal Reserve chairman Ben Bernanke on the occasion of Keynesian critic Milton Friedman’s 90th birthday in 2002[7]:

Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

Mr Morrison needs to remember that lesson.

Authors: Richard Holden, Professor of Economics, UNSW

Read more https://theconversation.com/vital-signs-covid-19-recession-is-different-and-we-need-more-stimulus-to-deal-with-it-141037

SME Business News

Brand Storytelling: How Video Marketing Can Enhance Your Brand Identity

In the competitive landscape of 2025, building a strong and recognisable brand identity is crucial for standing out in the marketplace. One of the most effective ways to shape and communicate y...

Future-Proofing Your Business with Strategic Defence Insight

In an era marked by rapid technological change, global uncertainty, and evolving security risks, the need for long-term resilience in business has never been greater. Organisations across indu...

Maximise Your Amazon Profits with These 5 Simple Seller Strategies

Selling on Amazon offers countless opportunities for individuals and businesses to grow their income. But with so many sellers joining the platform every day, it’s not enough to just list your ...

Why Professional Mining Electricians Are Critical for Mine Safety and Operations

The mining industry, with its complex and hazardous environments, demands high standards of safety and efficiency. One pivotal role in ensuring these standards is that of professional mining el...

The Times Features

Why Regional Small Businesses in Bendigo Deserve Better Access to Finance in 2025

In the heart of regional Victoria, Bendigo has long stood as a beacon of innovation, resilience and community spirit. As we step further into 2025, the importance of nurturing sm...

Is It Time for a Deep Cleaning? Signs You Shouldn’t Ignore

Most people know they should visit the dentist for a regular check-up and cleaning every six months. But sometimes, a standard cleaning isn’t enough. When plaque and tartar build...

The Hidden Meaning Behind Popular Engagement Ring Cuts

When it comes to engagement rings, the cut of the diamond is not just about aesthetics. Each shape carries its own symbolism and significance, making it an important decision for...

Annual Health Exams in the Office: How They Can Reduce Sick Days and Healthcare Costs

Regular health check-ups, especially annual health exams in the office, can significantly impact the overall well-being of your workforce. A proactive approach to employee health...

Best Deals on Home Furniture Online

Key Highlights Discover the best deals on high-quality outdoor furniture online. Transform your outdoor space into a stylish and comfortable oasis. Explore a wide range of d...

Discover the Best Women's Jumpers for Every Season

Key Highlights Explore lightweight jumpers for spring and summer, ensuring breathability and ease. Wrap up warm with cozy wool jumpers for the chilly autumn and winter season...

Business Times

Brand Storytelling: How Video Marketing Can Enhance Your Brand Id…

In the competitive landscape of 2025, building a strong and recognisable brand identity is crucial for standing out in the ...

Future-Proofing Your Business with Strategic Defence Insight

In an era marked by rapid technological change, global uncertainty, and evolving security risks, the need for long-term res...

Maximise Your Amazon Profits with These 5 Simple Seller Strategie…

Selling on Amazon offers countless opportunities for individuals and businesses to grow their income. But with so many sell...

LayBy Shopping