On Tuesday, as news came that metropolitan Melbourne was going into lockdown, the OECD released its latest projections that highlighted not just the impact of Covid-19 on the world economy but also warned of the massive damage a double-hit would do.
We live in bizarre times. On Tuesday the Reserve Bank issued its latest decision on interest rates, and it barely rated a mention in the news.
Not that we lack for news. The announcement of the lockdown of the greater metropolitan Melbourne area and the shutting of borders is so historically shocking that is says everything about how dreadful 2020 has been that it feels wholly unsurprising.
And yet the impact it will have on the economy will be immense.
Victoria’s economy accounts for around a quarter of Australia’s total economy – and of course a majority of that is contained within the metropolitan Melbourne area.
ANZ’s Shane Oliver estimates that if the lockdown leads to a 3% drop in its output, that would lead to a 0.75% hit in the September quarter to Australia’s GDP. The good thing is he suggests that is an amount “which should be more than offset by other states still reopening”.
But it highlights how precarious the economy is at the moment, for while Victoria makes up a quarter of the national economy, it has been much more vital to the growth of the economy over the past five years:
Since the end of 2014, Victoria’s state final demand (essentially its domestic economy, not including trade) provided around 38% of the growth in the nation’s economy – outstripping even the contribution of the larger New South Wales.
The importance of Victoria, and Melbourne in particular, is most especially seen in employment growth over the past five years.
Thirty three percent of the increase in Australia’s employment from December 2014 to December last year occurred in greater Melbourne.
In that time, the number of men in Australia working full-time grew by 302,000, and an astonishing 46% of those were living in the greater Melbourne area:
Since the end of 2014, the greater Melbourne area has seen a surge in male full-time employment never before witnessed in that state:
All of which is to say that Melbourne going into a lockdown for six weeks is not good news for those hoping the economy was going to bounce back.
And it reinforces that when it comes to recessions, recovery is rarely smooth and rarely as good as hoped. With the Covid-19 recession, however, the added wrinkle of a second wave, or isolated breakouts, is going to be likely until a vaccine is available.
Despite what Donald Trump may wish people to believe, this virus is not “at some point ... going to sort of just disappear”.
It means when we look ahead we need to be more mindful of setbacks than we usually would be after a recession.
This week the OCED has done just this, issuing a set of projections for economies across the world that consider two scenarios – a single hit and a double hit, “in which the current easing of containment measures is assumed to be followed by a second, but less intensive, virus outbreak taking place in October/November”.
The OECD estimates such a double hit would see Australia’s unemployment rate rise from an expected 8.3% in December to 9.1% and remain there until the middle of next year:
The Melbourne shutdown is a good indicator that such a double-hit scenario is already upon us – at least in a smaller form than the OECD has anticipated.
It suggests that even predicting a double hit is itself difficult, as what is more likely is not a one or two-month breakout, but that separate areas around the country have their own double hit at different times.
But even if we keep to the most optimistic outlook, the OECD still has our unemployment rate at 7.4% heading into 2022 – higher than it ever has been this century.
The outlook for the overall economy is in some ways even worse.
A double hit would knock the recovery back a year. Where we would have expected to be with a single-hit recession in December this year, we would now only reach at the end of 2021:
But even more despairing is how far behind our economy would be compared with where we were expected to be given the past five years.
Even with the single hit, the OECD expects our economy by the end of next year to be nearly 6% smaller than was expected before the virus hit – back at 2019 levels. With a double hit it would be more than 9% smaller – back at 2017 levels.
Essentially a double hit would see us go from losing three years of growth to five years.
Our recovery is going to take a sizeable hit from the Melbourne lockdown, but more important is that the rest of the nation take it as a warning and realise just how damaging every extra hit is to our hopes of limiting the depth and length of the recession.