Quick bounce back unlikely for Australian economy post-coronavirus despite political optimism

When will the penny drop? Better still, make that a dollar.

It’s now becoming clear that even if we do get back to some semblance of normality, whatever that may be, it will be a much longer climb back than our leaders are willing to concede.

Hope springs eternal in the halls of power and, in times of great uncertainty such as these, it’s about all we can cling to.

On Friday, the Reserve Bank forecast unemployment would hit 10 per cent this year and remain high until the end of next year.

Despite this, it was forecasting what is known in the game as a V-shaped recovery, where, once we are through the health crisis, the economy will quickly rebound back to where it was.

Prime Minister Scott Morrison and Treasury are even more optimistic, forecasting a “snap back” with 800,000 jobs returning in no time at all. And they are not alone.

A few hours before the RBA released its projections, the Bank of England was doing the same. The situation was dire but the outlook positive. The recovery certainly would be a V for victory.

The UK was facing the worst economic downturn in 300 years, it announced, but the bounce would be equally as speedy as the decline.

Despite the chutzpah, stunned economists were quick to shoot down the rosy projections.

The International Monetary Fund similarly loudly has embraced the V. But as the damage bill continually rises, that V has started to look more like a U or, even more worryingly, perhaps even an L.

This time around, it is governments on the hook for the bail-outs. This time, there will be only limited help from central banks.

For this is the first major recession the world has entered in more than 5,000 years where interest rates are at zero.

Central banks, while not entirely out of ammunition, already have spent their entire arsenal of conventional weaponry.

Interest rate policy is now impotent.

What happens when governments turn off the stimulus tap?

While our Federal and State Governments have handled the health crisis brilliantly, Australia and New Zealand are outliers.

The pandemic that has swept through the developed world and has only begun to wreak havoc in developing nations, is likely to have a long and lasting impact on the global economy.

Consumer behaviour will change, businesses will be hesitant to invest and, as in almost every other recession, armies of workers will struggle to earn a wage.

National or even regional recessions can be devastating enough. Global recessions are something else again.

Australia is a small export-oriented country, at the whim of global forces.

A protracted downturn in the US — where the unemployment rate is estimated at 15 per cent — and continued sluggishness in China will have a direct impact on us.

So far, we have been relatively insulated from the forces wreaking havoc on global commerce.

Unlike previous recessions, and particularly during the Global Financial Crisis a decade ago, governments around the globe have been quick to fork out the cash.

That has enabled spending momentum to be maintained, significantly easing the pain.

When it comes to bail-outs, our response has been right up there.

A study by BIS Oxford Economics last week ranked Australia’s financial support packages as the second-largest in the world, beaten only by Qatar.

The 46 countries surveyed so far had thrown a collective $13 trillion at supporting their economies.

Our $214 billion may seem small in comparison but our direct financial injection when measured against GDP, was 10.6 per cent of our economy.

The US had spent 6.9 per cent and the UK just 3.1 per cent.

But what if this all goes on for much longer than expected? A vaccine, if one can be produced at all, still is a long way off.

Will we be able to afford continued support for the unemployed and for businesses laid waste by the virus?

Mindful of the debt bill that future generations will need to repay, Mr Morrison and Treasurer Josh Frydenberg have been adamant the Jobkeeper and Jobseeker programs will be finite, that they’ll end in six months.

But consider this. If the Reserve Bank’s projections are correct, and unemployment remains elevated until the end of next year — with a 7 per cent jobless rate — what will happen to the economy if the one thing propping it up suddenly is removed?

Will landlords continue to forgive rent? Will the banks ignore the mounting toll of souring debts? Unlikely.

The RBA and its V for victory

Every three months, the Reserve Bank issues its Statement of Monetary Policy. It’s supposed to be a look at how we’re travelling and where we might be headed.

For quite a few years now, it has copped its fair share of criticism for overly rosy projections about the economy.

Everything from wages growth and economic growth to inflation and even the outlook for interest rates have painted a picture of Australia emerging from a rough patch and towards sunny skies.

None of it has eventuated.

On Friday, it again was forecasting a recovery. Its presentation was full of Vs. Employment, GDP, the whole gamut.

The only problem was the right-hand side of the Vs don’t quite match up to the left-hand side.

Two years out from now, according to the projections, we still won’t be back to anywhere near where we were a few months ago.

Take a look at this Reserve Bank graph on employment and hours worked.

What it shows is that by the end of next year, a great many Australians who were employed just a few months ago will be jobless.

And of those with work, many won’t be working the hours they’d like. All of which adds up to a much lower level of income.

That means less spending and lower profits for businesses.

Bear in mind, this follows a protracted period of painfully weak wages growth which was weighing on consumption and economic growth well before COVID-19 hit.

The figures above are the baseline figures; the most likely outcome.

There’s also a set of super rosy projections where we get a vaccine or the virus disappears and everything magically returns to normal.

And there’s another where the virus reappears, lockdowns are reimposed and the economy nosedives.

No easy answers for Government in post-lockdown economy

Out there in investment world, confusion reigns supreme.

The broader market is still way down from its peak early this year, putting it into a technical bear market.

But in a weird quirk, it has bounced back from its March 23 lows by more than 20 per cent, putting it into a technical bull market.

Glass half full or half empty? The choice is yours.

Three of our big four banks reported half-year earnings in the past fortnight.

Each announced billion dollar plus hits from projected rises in bad debts. Two suspended dividends and the National Australia Bank slashed its payout to the bone.

But each has wildly differing views of the future and particularly the expected downturn in the housing market. Commonwealth Bank this week will complete the picture when it updates the market.

Tomorrow was supposed to be budget day. It was supposed to be the day a triumphant Treasurer Frydenberg announced the first surplus in more than a decade.

It probably will go unmarked.

But the betting is that when this year’s deficit is announced later this year, a lethal combination of soaring unemployment, depressed housing prices and an already-spent Reserve Bank will blow out the anticipated shortfall for this year and for the foreseeable future.

Politically, the Government is on a hiding to nothing. If it extends the welfare packages, it will be accused of blowing the budget for generations to come.

If it doesn’t, the recovery will take even longer and cost society even more.