While the government has described the economic hit of the coronavirus as worse than the Great Depression, Treasury secretary Stephen Kennedy has suggested Australia will avoid a classic depression where the economy takes years to recover.
Dr Kennedy told a Senate inquiry the discussion was "well past" recession. The fall in the global economy would be much bigger than an earlier International Monetary Fund prediction of 3 per cent, and was likely to be around 7 per cent in the United States and Europe. While China had started its recovery, international markets were fragile and depended on being able to open up without a second wave of the virus flushing through, he said.
"The outlook is significantly gloomier than the one outlined by the IMF and then beyond the falls, quite a lot of uncertainty given the unknown period we have around second waves," he said.
But depressions usually involved a long-drawn-out period of very high unemployment, very low growth and dysfunctional credit markets.
The coronavirus was a very different shock, and the recovery would depend on how well the disease was managed, which was hard to predict, and on the flow-on consequences of creating "a big hole" in economies for three to six months.
"The way we entered this and the nature of this shock gives me some hope that if governments respond well, particularly through their fiscal levers, that we needn't have what's called the L-shaped economy, and I guess that's what people would think more of as depression-type economics," Dr Kennedy said.
He was optimistic, but the recovery would depend on a return of confidence and willingness to invest - and if a second wave of disease forced another eight-week shutdown, the picture would be much worse.
Housing and business investment would signal a return of confidence.
"The glimmer of hope is all that productive enterprise that sat there at the beginning sits there at the end," Dr Kennedy said.
"And the question is whether you've avoided the destructive cycles of firms going broke because they just ran out of cash across the bridge and people losing confidence and becoming very precautionary.
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"The one area which we will watch very carefully is the recovery in housing and business investment."
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