In a recent interview with The Bloomberg podcast OddLots, economist Nouriel Roubini predicted that the US would have a bad recovery from the Covid-19 pandemic, inflation and then a ultimately a depression (1). That outlook is bleak. Perhaps not over-reactionary. Over 20 million people were newly unemployed in the US last month. The US has by far been the hardest hit country by the pandemic. It was arguably still somewhat fragile, with low interest rates and high federal debt leading up to the pandemic. In recent days, large companies like Neiman Marcus have filed for bankruptcy. I think it wont be much surprise if in the coming weeks and months weak businesses will continue to go into administration or file for bankruptcy.
In my native Australia we have also seen a worrying trend over the last year of established businesses going into administration or filing for bankruptcy in the midst of increasingly low consumer confidence. Virgin Australia, Jeans West, EB Games and Kikki-K just to name a few. Many retailers, such as department store Myers and airline businesses such as Qantas have closed their doors and stood down tens of thousands of employees as a consequence of the pandemic. In Australia it seems the pandemic has been the straw, all be it the hay bale, that has broken the camel’s back for these retailers that were already struggling beneath the surface, especially after the tough Christmas we had with bush fires ravaging the nation.
Is recession in the US and Australia likely? Yes, it is imminent. Is another Great Depression likely? Nouriel Roubini described the possibility of the “I” as opposed to the “V” or “U” shape “recovery”, by “I” shape that refers to straight down into a depression. There could be over 2 million unemployed in Australia right now (2). When I saw the queues outside Centrelink (the jobless office) here in Sydney, that stretched for ~100 m or more — I seriously worried depression was around the corner. But, the outcome likely depends greatly on government policy and how well it works to alleviate the stress on the economy caused by the pandemic — arguably the biggest economic shock on record. Definitely the biggest shock in the last 100 years. Why government? Because government (rightly) shutting down the economy, has been the force that has stopped so much economic activity. Shutting down or partly shutting down huge sectors of the economy such as tourism, retail, airports and transport. Business can only try to hold out at this time, but it is government pulling all the strings, and for that reason, like it or not we are more reliant than ever on good government economic fiscal policy.
In Australia, quantitative easing policy set out by the RBA should help finance government debt and prevent liquidity drying up. JobSeeker and JobKeeper payments will help people afford their living costs during the pandemic, stay engaged with their employer where possible and hopefully to spend a little to boost economic activity, however spending is probably a pipe dream, with the Australian Bureau of Statistics releasing statistics that over half of people saved their $750 stimulus payment rather than spending it (3). A strong indication in my opinion that people do not feel confident to spend even additional money coming in from a stimulus payment and that consumer confidence is probably still about as low as in April when it walked off a cliff.
Job advertisements in Australia have also walked off a cliff in May. Unemployment, consumer confidence and job advertisements have, to paraphrase Greg Jericho of the Guardian Australia, broken the scale by which we measure them (4). The same can easily be said for the numbers out of the US. As Greg Jericho has said, the scale is broken.
But can governments of the US and Australia hold things together when they have spent so much effort over the past decades dismantling social security and making government smaller? Australia is in a better position considering it has achieved less dismantling than the US, but even we in Australia have put ourselves in a precarious position through the past three decades of policy that targeted cuts to welfare payments, education and healthcare.
(1) OddLots 4 May 2020 Nouriel Roubini Sees A Bad Recovery, Then Inflation, Then A Depression. https://www.bloomberg.com/news/audio/2020-05-03/nouriel-roubini-sees-a-bad-recovery-and-a-depression-podcast
(2) Shane Wright and Eryk Bradshaw, March 23 2020, ‘Worst since 1932′: Two million Aussies face unemployment queue’ https://www.smh.com.au/politics/federal/worst-since-1932-two-million-aussies-face-unemployment-queue-20200323-p54d14.html
(3) ABS COVID-19: One-third of households financially worse off https://www.abs.gov.au/ausstats/abs%40.nsf/mediareleasesbyCatalogue/DB259787916733E4CA25855B0003B21C?OpenDocument date viewed Fri, 8 May, 2020
(4) Greg Jericho, The Guardian Australia https://www.theguardian.com/business/grogonomics/2020/mar/24/when-it-comes-to-unemployment-in-australia-definitions-have-been-broken