News

Although not official, Australia is currently in a recession. The reasons for this are almost wholly due to the decision-making of the Morrison and Berejiklian governments. By Mike Seccombe.

Morrison’s hidden recession

NSW Premier Gladys Berejiklian and Prime Minister Scott Morrison.
Credit: AAP / Mick Tsikas

Australia is once again in a deep recession, says Saul Eslake. That’s the reality, if not yet the case according to the technical definition. It’s the recession we didn’t need to have, Eslake says: the Morrison–Berejiklian recession.

The official data is not yet out, but market economists, the Reserve Bank and even Treasurer Josh Frydenberg expect it will show Australia’s economy shrank in the September quarter, for the obvious reason that New South Wales was in lockdown for almost the whole three months, Victoria was in lockdown for half that time, and most of the rest of the country was under restrictions for substantial periods.

We’ll have to wait for the Bureau of Statistics (ABS) to tell us just how bad the economic damage has been. But Eslake, a former chief economist at ANZ, notes estimates that the shutdown of Sydney is costing about $1 billion a week and the lockdown of Victoria about the same. Add in reductions in economic activity in regional NSW and the other states and territories and the total is probably in the order of $3 billion a week. In normal times, Australia’s gross domestic product (GDP) is about $40 billion a week. That’s a huge hit.

Frydenberg still holds hopes of a recovery in the December quarter, in which case the downturn would not meet the technical definition of recession – two successive quarters of contraction. But the prospect of that recedes with each day’s Covid-19 infection numbers.

If the lockdowns continue into October or even November – which appears highly likely in NSW, given the failure of the state government’s belated efforts to control the spread of the virus, and is entirely possible elsewhere – then Australia will end 2021 officially in recession.

“But,” says Eslake, “I would say we’re in a recession now.”

Eslake makes the same point about the June quarter last year. The economy shrank by 7 per cent in three months, several times larger than any postwar recession, and certainly it felt like a recession; but it clawed back about half the fall in the following quarter, and so did not meet the official definition.

This time is different, though, Eslake says.

“Last year’s recession was one that we truly had to have, to borrow Paul Keating’s notorious phrase. There was no alternative to shutting down when we didn’t know what the virus could do to people, and we didn’t know how long it would take to develop an effective and safe vaccine.

“But the one we’re having now is not one we had to have. It’s one we wouldn’t have had if the federal government had made better choices about vaccines.”

He ticks off the mistakes: putting too many eggs in one vaccine basket, because of a combination of cheapness and a misplaced “obsession with so-called sovereign manufacturing capacity”; dawdling with the rollout and saying it wasn’t a race; failing to do enough to correct misapprehensions about the risks of AstraZeneca (Vaxzevria), which resulted in widespread vaccine hesitancy.

Other nations avoided these mistakes. Eslake points to Canada which, like Australia, had no capacity to make mRNA vaccines. “But they didn’t care,” he says. “What they wanted was to get as many jabs into as many arms as quickly as possible. So they ordered enough Pfizer and Moderna.”

By mid-July, Canada had 50 per cent of its population fully vaccinated, while Australia was at 11 per cent. Canada now is close to 70 per cent.

Had the Morrison government shown similar urgency and competence, Eslake says, “we wouldn’t be in this position”.

“And, likewise, there were bad choices by the NSW government,” he says. “Remember, the Delta variant is here because the NSW government wouldn’t mandate masks and vaccinations for people transporting incoming flight crew to their quarantine.”

Compounding that initial mistake, he says, the Berejiklian government was guilty of “dillydallying and double standards” on the lockdown, failing to move decisively in response to the initial outbreak among “its own people” in the affluent eastern suburbs, then adopting a very heavy-handed approach when the outbreak spread into less advantaged areas in the city’s west, where people tend not to vote conservative.

Eslake is not a partisan, although he was long ago a member of the Liberal Party. He comes at these questions as an economist reviewing data. He is not arguing for the states to open up: the data from all around the world, he says, show jurisdictions that prioritised economic openness over public health only succeeded in “buggering it up” on both grounds. “They had both worse health outcomes and worse economic outcomes,” he says.

Britain, for example, did not prioritise public health, and suffered more than 130,000 deaths and a 25 per cent hit to its GDP.

Of course, you can’t, as Scott Morrison says, “stay in the cave forever”. But you have to venture out cautiously, as the British experience also suggests.

On July 19, Prime Minister Boris Johnson declared “freedom day”, allowing the reopening of all businesses, the removal of crowd limits, requirements for social distancing and the wearing of face masks indoors.

On that day, Britain recorded more than 39,500 new cases. Just under 70 per cent of adults were fully vaccinated, which equates to 54 per cent of the total population.

Two things promptly ensued. One was that Covid-19 case numbers fell – for about two weeks, just long enough for newly liberated Britons to infect one another – and then began going up again. This week, case numbers are again well above 30,000 a day and the rate of increase is accelerating. There are about 100 deaths a day.

The second thing that happened was that Johnson’s poll numbers fell sharply. His net approval, averaged across 12 different surveys by various pollsters, taken between “freedom day” and Monday this week, was minus 12 per cent.

Morrison appeared to recognise this risk at his Monday media conference. He assured Australians his government had a “plan” for reopening Australia. He said the word 34 times, in fact.

He also said, in direct reference to Britain’s experience: “There’s no freedom day here. That’s not what my plan is. I mean, a day is not going to change it. Seventy per cent’s going to change it. Eighty per cent’s going to change it ... That’s what actually drives the decision about when you can go to the next step. Now, I’m all for freedom, and the passage to that is based on clearing those gates of 70 per cent and 80 per cent. What day we will hit that? As soon as we possibly can.”

Australia currently is only in the first of four “phases” of the plan, formulated with reference to modelling by the Doherty Institute. Phase A will persist until 70 per cent of the population over age 16 (equivalent to about 55 per cent of the total population, when kids are included) is vaccinated. It provides that until Australia gets to 70 per cent, government should “strongly suppress the virus for the purpose of minimising community transmission”, including by “early, stringent and short lockdowns if outbreaks occur”.

Phase B, to apply until vaccination rates reach 80 per cent of over 16s (about 64 per cent of the total population), also provides for lockdowns, although it says they will be “less likely”.

But Australia is a long way from reaching those targets, and thus a long way from ending lockdowns and state border closures.

According to analysis of the data from the ABS and Health Department, done by Guardian Australia, the ACT will be first to reach 70 per cent, by the end of next month. The other jurisdictions won’t get there for another seven to 10 weeks, except Queensland, which won’t hit 70 per cent until late November and won’t reach 80 per cent until the week before Christmas.

That’s assuming current rates of vaccination continue. In other countries, rates have dramatically slowed once they get to about 70 per cent. An Essential poll last week found something similar here. While only 8 per cent of respondents said they would never take the vaccine, another 24 per cent still were procrastinating.

Even if that resistance can be overcome, we will likely see lockdowns and border closures, and the attendant economic damage, for months to come.

Ultimately, the reopening of Australia will come down to an assessment of risk: health versus economic, with political risk also considered. Throughout the pandemic, the most popular politicians have been the most risk-averse.

The latest Essential poll showed the Western Australian government, which has all but seceded from the rest of the country via its stringent border closure, riding high with 87 per cent approval of its handling of Covid-19. All five of the big states (the survey excluded Tasmania and the territories) recorded higher approval than the federal government. Even in locked-down NSW, 42 per cent of respondents thought the Berejiklian government was doing a good job, compared with 41 per cent who thought the federal government was.

Yet Morrison is increasingly targeting the states for criticism, pre-emptively accusing them of not sticking to the road map out of the pandemic that his government has announced, and to which national cabinet agreed.

Actually, they have done no such thing – at least not yet. Border closures are entirely consistent with phase A of the plan which, as previously noted, aims to “strongly suppress the virus for the purpose of minimising community transmission” as well as lockdowns.

But it’s not hard to see why Morrison is doing it. Having been blamed for the slow vaccine rollout, he is trying to shift blame for the consequent recession – and it may well be a good strategy, suggests Eslake.

After the first lockdown-induced recession last year, the economy roared back to life, fuelled by consumer spending. And that could happen again.

“Households have socked away, since February last year, $145 billion more in bank deposits. They have ample wherewithal to go out and spend when they are free to do so,” Eslake says. “And the evidence, not just from Australia but other countries, is that’s what they will do.”

So while the next few months may be economically bleak, it could be a very prosperous new year. The political question, Eslake says, becomes whether people “remember why we’re going through what we’re going through now”, or whether the joy of being out of the cave, with money to spend, makes them inclined to forgive.

We won’t know the answer to that until they get to the ballot box.

This article was first published in the print edition of The Saturday Paper on Aug 28, 2021 as "The Morrison recession".

A free press is one you pay for. In the short term, the economic fallout from coronavirus has taken about a third of our revenue. We will survive this crisis, but we need the support of readers. Now is the time to subscribe.

Mike Seccombe is The Saturday Paper’s national correspondent.