COVID-19 vaccination slowdown risks double-dip recession

Vaccine deployment is still slow, stimulus measures are lukewarm, housing is cooling and population growth has stalled.  Prepare for a series of bad economic news.  Source: Getty / Yahoo Finance

Vaccine deployment is still slow, stimulus measures are lukewarm, housing is cooling and population growth has stalled. Prepare for a series of bad economic news. Source: Getty / Yahoo Finance

Until the end of 2019, Australia enjoyed a record 29 years without a recession. It was a proud record that had been chaired by Labor and coalition governments.

Premiers Keating, Howard, Rudd, Gillard, Abbott and Turnbull had all generated uninterrupted economic growth and most importantly no recession.

This is not the case with Prime Minister Scott Morrison.

As the start of the COVID-19 pandemic plunged Australia into recession in 2020, odds are diminishing that Morrison and Treasurer Josh Frydenberg will chair another recession in the second half of 2021.

That is to say two recessions in two years.

More than The Kouk:

The simple reason for a possible second recession is the emergence and spread of COVID-19 over the past month, which has seen half of Australia locked up, businesses closed, jobs lost and economic unrest unleashed.

Put simply, the Morrison government’s reluctance and inability to procure enough vaccines means Australia is the last in the industrialized world in terms of vaccine rollout. As a result, people are vulnerable to COVID-19 and it is spreading across much of Australia unless huge sections of society are locked down.

Health experts say if more Australians had been fully vaccinated against COVID-19, the current outbreak would not have been so severe.

A recession is also increasingly likely because the financial support for people affected by containment was stingy, clogged with paperwork and inadequate.

Financial assistance is not, at this stage, large enough to provide sufficient income to businesses and workers to enable them to keep their spending at a rate sufficient to avoid a much weaker economic outlook.

On another level, this time around unlike 2020, the Reserve Bank cannot provide monetary policy support. The monetary stimulus has been a key factor contributing to the economic recovery at the end of 2020 and no such stimulus is in sight this time around.

The economy will hit a brick wall (COVID-19)

What makes this outlook all the more baffling is the fact that the economy was incredibly strong in the first half of 2021.

The good news quickly escalates.

Economic growth has been remarkably strong, employment growth has been at a record pace, and the drop in the unemployment rate in just over a year was the biggest drop on record. At the same time, wage growth was accelerating, the housing market was strong, investors were pushing the stock market to record highs, and business conditions and consumer confidence were downright exuberant.

This force was such that investors were pricing in at the start of an RBA interest rate hike cycle in late 2022, well ahead of the 2024 deadline set by the RBA. A rate hike would only happen if the economy was strong.

GDP drop in the September quarter

All economists assess the economic effects of the current blockages. While this is clearly an ongoing event – no one can be sure how long and how long it will last – there is a growing consensus that GDP growth for the September quarter will be negative.

Seems like a fair assessment with half of Australia locked in.

The question for a recession is whether the GDP in the December quarter will also be negative.

Even assuming the lockdowns end in September, the following December quarter could also be weak.

Housing is in full swing and consumers are likely to be cautious about their spending intentions. Although there is still, for now, a powerful wealth effect linked to rising house prices and inventories, it can quickly stall.

The export side of the economy is expected to fade. Resource export volumes appear to be peaking in line with China’s slowdown in GDP, which could be even more evident in the December quarter.

Government demand is also slowing in terms of contribution to net GDP. This could see a small contribution to GDP over the next few quarters.

It is important to note that with the closure of international borders, population growth is expected to remain close to zero, which means that a critical increase in economic activity simply due to the increase in the number of people will not be evident in the December quarter.

The unemployment rate could quickly climb to 6% from 4.9% currently.

Another recession? It will be a near call

Prepare for a series of bad economic news.

The deployment of the vaccine is still slow. The political revival is lukewarm. The international economy is slowing down. Housing is showing signs of cooling and population growth has stalled.

Consumer demand and other government support will be essential. But if consumers squat with lost jobs and fewer hours, and government stimulus measures are inadequate, a decline in GDP in the September quarter will be almost assured and weakness will continue into the December quarter.

Data for the September quarter are released on December 1 and data for the December quarter on March 2, 2022.

In addition to the economic shock of a double-dip recession, if Morrison postpones the election to a date after March, he will campaign with the economy on its knees.

It will be decisive in the way people vote.

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