12 Jan 2021
Technically Australia’s world record run of any advanced economy without a recession has been broken. However, the financial impact of the deep Covid driven recession was far less than expected. For those who remember back to the early 90’s recession when Paul Keating was Prime Minister, for most Australian’s the financial impact was minimal and we did not see the massive bankruptcies feared. It has certainly been tough in certain industries, but we have seen very strong conditions in other areas.
The reason for the quick rebound was the most massive global economic stimulus in history. Without that we would have seen a complete economic meltdown, but due to the huge injection of cash, incomes actually increased during Covid. With Jobseeker, Jobkeeper and all the one-off payments, income rose. At the same time, our limited ability to spend (such as our inability to travel or eat out), and rock-bottom interest rates resulted in a sharp rise in the savings rate. It also reversed a long-term trend towards spending on services rather than goods, as many services were not available.
Recessions are a part of a normal functioning economy. They rebalance the system, as the weak businesses fail, resources are reallocated to stronger businesses / industries and overleveraged and speculative investors are punished. It is a time to refocus on efficiency. Recessions remove all the excesses and imbalances that always build up in the good times and clean out the system.
In the GFC and even more so, in the Covid pandemic, governments and central banks took unprecedented action to ensure we did not spiral into a self-reinforcing downturn. These shocks were so big, that the system needed to be protected and as result we saw less impact than previous downturns that did not warrant the same level of intervention.
This has resulted in imbalances becoming more pronounced. Ridiculously low interest rates have allowed debt levels to reach new extremes. Interest rates cannot go any lower and at some point, governments cannot just pile on more debt. This is currently sustainable as inflation remains low and therefore interest costs are low. Inflation has been low for a very long time, but if it does rear its head, the ability of governments and central banks to go all out in the next downturn without creating other problems will be hampered. The desire of policy makers for a strong recovery increases these risks, especially if the stimulus goes on too long.
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