The economics data continues to be dire, but as we look forward, it is worth remembering that the return to “normal” growth is not the only aspect at play. What is often forgotten when looking at recessions is not the time taken to “snap back” but the ongoing loss to production and jobs that sometimes is never regained.
Early February was not a good time to be making economic forecasts. I speak from some experience, because on 4 February I wrote that “talk of a recession is a bit premature”. So it gives me some small comfort to note that the Reserve Bank’s statement on monetary policy on 6 February also saw little sign of the recession ahead.
But how do times change! Fast forward to last Friday and the bank’s latest statement saw massive plunges in its economic forecasts.
In February it noted “The forecasts have also been revised a little lower in the near term to account for some effect from the recent bushfires and the coronavirus outbreak in China; beyond the near term, forecasts for growth are largely unchanged.”
Ah, the sweet optimism of three months ago.
Now, the RBA says “the Australian economy is expected to record a contraction in GDP of around 10 per cent over the first half of 2020; total hours worked are expected to decline by around 20 per cent and the unemployment rate is forecast to rise to around 10 per cent in the June quarter.”
The prediction for unemployment has gone from being as low as 4.75% to now hoping within two years it can fall back to 6.5%:
When the RBA predicts GDP growth and other measures it rather nicely provides its 70% and 90% confidence intervals.
In February, the RBA was 90% confident that annual GDP in June would be between 0.25% and 3.5%. That is a large range – the economic equivalent of a barn door, and yet they missed – and missed by a lot:
With this miss should also come some level of wariness when looking at its forecast for growth over the next two years.
It hopes that the 12 months to June next year will see the economy grow by 7%, and for growth not to fall below 5% until midway through 2022. Given the economy has not grown above 5% this century, that is a heck of a rebound.
But the associated unemployment figures show how huge is the task before us.
The RBA has forecast unemployment to rise and fall in line with the long-term relationship between GDP growth and annual changes in the unemployment rate:
The problem is unemployment rises faster than it falls.
Historically, if GDP falls 6% in a year, unemployment will rise about 4%pts; conversely if the economy grows by 6%, unemployment will only fall by around 1.5%pts.
That’s why even with the RBA estimating strong growth after this year, it still has unemployment around 1.3% points above where it is now – a difference of about 180,000 people out of work.
This is because when the economy goes backwards you need to not just get growth back to where it was, but you need to regain that lost production. We mostly talk about the growth of the economy, but we should not forget the actual amount is important.
After the 1990s recession, it took around eight years for Australia’s economy to get back on terms with where it had been heading:
That shaded area in the graph is lost potential growth – lost profit and household income.
You can see how massive this issue can be when we look at the UK before and after the GFC:
The GFC in 2009 knocked the size of UK’s economy back to 2005 levels – essentially setting it back four years. And over the past decade it has not only been unable to recapture that lost time, it has fallen further behind.
Last year, the UK economy reached a level that it would have been expected to achieve in 2013 had it continued along the 1993-2007 trend – essentially it was six years behind schedule.
And then came the coronavirus, which the IMF estimates will knock it back to 2015 levels – or where the UK was once on track to reach in 2010.
That means the UK, due to the GFC, Brexit and now the coronavirus, is around a decade behind where in 2007 you would have predicted it would be.
That’s why when we look at the RBA’s estimates, it is well to note that even with the estimated strong growth, the economy is not expected to recover to the size it was at the end of last year until March 2022:
If things go bad, that won’t happen until well into 2023 – or more than three years behind.
And even with the baseline we are still well behind where we were tracking – and unlikely to get back on the pre-virus trend until after 2023.
All of which make it seem rather odd to hear talk of winding back stimulus measures.
We have a long way to go – not just to return economic growth to where it was, but to get the size of the economy – and with it the jobs and income – back.
And given the level of uncertainty with the virus, such a return is very much not guaranteed.
• Greg Jericho writes on economics for Guardian Australia
