It’s very hard to overstate the impact that the Covid-19 virus has had on nations and individuals. Many reporters and analysts have used ‘unprecedented’ to describe the effect it has had, with government-imposed lockdowns resulting in countries coming to a virtual standstill.
As well as restrictions on movement and travel, governments have also been forced to quickly come up with levels of emergency economic intervention not seen since World War Two. We’re seeing high levels of corporate debt and national indebtedness.
Lockdown has seen many businesses almost fail as government-mandated restrictions on movement have drastically inhibited usual consumer activity. Even today, nearly six months after the virus outbreak, Melbourne is still in lockdown with restrictions on movement and a curfew. This has meant reduced spending and investment, resulting in some sectors coming to a virtual standstill.
For example, the tourist industry has taken a particularly hard hit, and others such as entertainment and leisure are only starting to slowly reopen.
The priority for all governments has been to support individuals and business – the latter with both support to stay open and an encouragement to continue investing as far as possible.
The level of government stimulus has been massive. By the beginning of June – three months after the outbreak of Covid-19, the Australian government had already announced over AUD 250 billion of packages to support business and families. That figure is 13% of the total Australian GDP.
Markets suffered greatly as businesses reacted to the uncertainty. Many suffered their biggest falls since the 2008 crash. The ASX dropped 36% between 21 February and 23 March 2020, and this decline was mirrored on other markets. Interestingly, however, the recovery has been swifter than after the global financial crisis of 2008.
The ASX recovered a lot of the ground lost, climbing back to 6,148 by as early as 9 June, and it has hovered around the 6,000 mark ever since. That performance has not been unique to Australia. Stock markets worldwide mirrored this – following the same pattern of an initial dramatic decline, but subsequent recovery.
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This could be a possible sign that the underlying business structures are sound, and the initial fall was more a reaction to the unknown impact of Covid-19.
Covid-19 has created so much uncertainty that no one can confidently predict timescales or the scale of recovery. As a report from KPMG stated: “The only thing certain about the current global economic outlook is that it is uncertain.”
The same KPMG report also suggests that it could take until Q4 2021 to recover to the levels seen at the end of 2019.
The International Monetary Fund (IMF) describes it, quite accurately, as ‘a crisis like no other’, and they are projecting global growth for 2020 at -4.9%, a figure not seen since World War Two.
Governments are already grappling with the difficult decisions of how and when support for families and business can be unwound as things start to get back to normal. Given the levels of borrowing, they are obviously keen to do this as soon as possible to prevent the deficit spiralling totally out of control. But there’s also the understandable desire to maintain sufficient business structure to drive economic growth once the virus has passed.
After getting through the ‘reopening the economy’ phase, a key priority for all governments will be to restore full healthcare capacity. Often overlooked is the knock-on impact on other illnesses and treatment, given the almost total focus on Covid-19.
In reality, that will depend very much on finding an effective vaccine for the virus. Such is the urgency that over 140 teams are working on developing vaccines, with encouraging WHO data showing that seven are now in the final stages of testing.
What will be the ‘new normal’, and how normal can it be without an effective vaccine? The second lockdown in Victoria announced at the start of August, has demonstrated that it could well take longer to get over the virus than initially anticipated.
Covid-19 has prompted the first recession in Australia for 29 years. Prime Minister, Scott Morrison, has suggested that growth of 1% above trend would be required to fully recover from the impact of Covid-19 pandemic by 2025. This has led to the usual debates about whether tax increases to help close the deficit are viable and needed.
But there are some positive signs. The IMF is predicting a gradual recovery with an economic bounce back in 2021 of 5.4%, making up all the lost gains from this year.
Low levels of consumer spending during lockdown will have inevitably resulted in an underlying pent-up demand, which could see a big consumer boom once people are able to travel and socialise normally again.
Closer to home, the relatively quick return to economic normality in China could augur well for economic recovery in Australia.
Two-way trade between China and Australia has risen from AUD 39 billion in 2008 to AUD 157 billion in 2018/19.That fourfold increase in trade was probably the biggest factor in the country’s post-2008 recovery. Iron ore exports were the key driver of that growth but increasing Chinese consumer demand for Australian goods provides a welcome sign that the post-Covid-19 recovery could be swift and effective.
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