'Our world has no rulebook on how to come out of this pandemic'


Former US Secretary of Defence Donald Rumsfeld once infamously quipped that there are "known knowns", "known unknowns", and "unknown unknowns".

Divining the trajectory of economic recovery from COVID-19 is a lot like this.

There are just so many variables at play, not least the timeline for ending the pandemic itself. So we reached out to six leading economists to get their take on what recovery could look like and the challenges we face along the way.

covid19 economic recovery

Jo Masters, Ernst & Young

Our current COVID-19 world has no roadmap, no precedent and no rulebook on how to come out of this pandemic, which makes predicting the economic recovery immensely challenging. Typically economists will use letters to describe the shape of recovery, usually debating a V versus a shallower U, but in the case of COVID-19 also W, L and even K. At EY we see it as more of a sawtooth pattern, or as I call it a Nike swoosh with a bumpy bottom.

What we are seeing in Melbourne at the moment is an example of what creates the bumpy profile. To cope with this shape, it's really important government, businesses and households are all nimble and able to adapt to bumps this pandemic throws at us. A significant challenge is that we don't know how long each bump lasts, how deep it will be or when or where the next one may hit.

On a positive recovery note, Australia has low government debt, a healthy central bank balance sheet and we're an attractive country to skilled migrants, so our longer term prospects are solid.

Simon Loertscher, University of Melbourne

Australia got hit by two big shocks this year: the coronavirus and the subsequent public policy response in Victoria. How it will recover depends in part on how soon the excessive and indiscriminatory lockdowns in Victoria end and largely on whether the inevitable flare-ups will be followed by further blows by a sledgehammer or more subtle and swift policy responses.

In the best-case scenario, which assumes drastic change in leadership in Victoria and the availability of an effective vaccine early next year, Australia may be back at the end of 2021 to where it was, economically, a year ago. In a more dire scenario, an effective vaccine proves elusive and public policy continues its frustrating stop-and-go. In this case, Australia is likely to suffer from widespread bankruptcy and large-scale unemployment for an extended period.

The tax burden due to unprecedented Government spending and the liberty-defying, draconian and at times cruel lockdown policies may bring high-skill immigration and thereby population growth to a halt, with unknown consequences for its capital cities and property prices.

Shane Oliver, AMP Capital

For most of Australia the recovery will feel more like a square root with a V-shaped initial rebound followed by a long grind back towards something approaching normal. The low was around April and much activity bounced back through May and June with the reopening, as many enthusiastically went back to the shops, cafes and restaurants. This looked pretty V-shaped but since then it's become a lot tougher.

For Victoria the lockdowns have given it another leg down and it will ultimately look like a W. But the rest of Australia has entered the slower phase of the recovery (or the flat part of the square root) as some industries (like travel, higher education and office related activities) take longer to recover and many businesses (e.g. parts of traditional retailing) may never come back at all. This will all show up most clearly in a long tail of high unemployment, which is ultimately why government support will be needed for a long while yet.

Richard Holden, University of New South Wales

Once the virus is brought under control in Victoria and state borders reopen the Australian economy is very well positioned to commence a strong recovery. This needs to be supported by strong fiscal measures from the government. The real risk facing the country is spending too little, rather than too much, in supporting the economic recovery from a once-in-a-century global economic event.

Brendan Coates, Grattan Institute

Australians are in for a long and damaging economic slump, unless our governments inject substantially more fiscal stimulus.

The July budget update forecast that unemployment would hit 9.25% in coming months. The Reserve Bank is forecasting unemployment to hit 10% by Christmas. The Treasury now apparently expects it to remain above 6% for the next half-decade. That would be a disastrously sluggish recovery - as slow as the recovery after the 1990s recession, now widely seen as a failure of economic management. And it would be a slower recovery in employment than Australia experienced after the 1980s recession, or the US experienced after the global financial crisis.

It doesn't have to be this way - government policy choices can change this path. The Grattan Institute estimates that additional stimulus of about $100 billion to $120 billion would be enough to cut the unemployment rate by about 2 percentage points by the end of 2022. On current forecasts, this would bring unemployment back down to about 5% - about the level the Reserve Bank says is needed to get wages growing again.

Official forecasts point to economic policy failure. It's not too late to spend, and spend big, to avoid it.

Tim Harcourt, University of New South Wales

I think Australian rocks and crops keep us in good shape for corona recovery. There will be a lag before services - tourism and aviation - can join the rest of the economy in recovery. So it'll be two-speed recovery depending on the industry's susceptibility to the tyranny of social distance.

We're cutting through the confusion to help you manage your money during the coronavirus outbreak. Click here for more on how COVID-19 could affect your job, budget, super and investments.


David Thornton is a journalist at Money magazine. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.
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