September 3, 2020 by Dymphna

Recession is here. Now what?

Silhouette of a man in a business suit giving a shrug with a question mark

Looking at yesterday’s GDP data, there’s one story that jumps out at me.

So Australia racked up a recession yesterday, and didn’t we do it in style?

The economy contracted 7.0% in the June quarter, the largest fall on record.

It’s a little bit hard to make sense of a number like that. It is massive, given what is normal.

So the economy normally grows about 2-3% a year. That’s about 0.6 – 0.8% a quarter. So a 7% fall in a single quarter is massive. We’ve never seen anything like it.

That said, given that the economy normally grows at 2-3% a year, if we go backwards 7%, we’re effectively giving up 2 to 3 years of growth.

So you know, that puts us back around where we were in 2017.

If you cast your memory all the way back to 2017, you’ll remember that it wasn’t that bad. Actually, it was pretty good. It’s not like we’ve gone back to the stone age, like circa 2006, or anything.

So yes, it’s an epicly bad number. But the economy is still holding it together. We’re still on the road.

That said, I’m not trying to polish a turd here either. This is a pretty brutal result. Particularly when you scratch the surface and see where this is coming from.

Because the way I see it, it’s coming from fear.

That’s my read on it.

The biggest contributor to the fall in GDP was household consumption. Consumption expenditure fell a record 12.1% in the quarter, and accounted for almost all of the fall in the headline numbers.

You might think that this was driven by unemployment and falling household income, but that’s not the full story.

In fact, the fall in consumption was largely a result of consumers bunkering, and diverting income into savings.

The household savings ratio exploded from 6.0% in March to 19.8% in June, which is the highest level recorded since the 1970s.

So this is a fear economy. A fear-conomy. Households are being driven by what they fear is coming, not by their actual financial situations.

That means two things.

First, government spending can’t save us.

Government spending was huge in the quarter, largely thanks to the massive JobKeeper program:

However, even if you can save household incomes, you can’t make them spend it. And that means the government is a bit powerless to support consumption spending, and therefore powerless to support the economy.

The only way to fully bullet-proof the economy is by fixing confidence. But that either means spending so much money that people go crazy, or engaging in some sort of old-school propaganda.

Neither of those things are going to happen.

So we’re in a bit of a bind here.

Still, the fear-conomy does have one silver lining – it can turn very quickly if confidence returns. If we suddenly get a super-vaccine or something, we could find ourselves bouncing very quickly out of the hole.

The question then is, how long can confidence remain in the gutter before we start doing real damage to the economy?

I’ve got nothing but speculation for you on that one.

But still, this is how I think we can understand yesterday’s GDP figures. Australia is stuck with a fear-conomy for now.

For the moment, everything swings on mood.