BONUS EPISODE: Recession revisited

23 minutes

Contributors

Ross Gittins

BCom (Newcastle), Hon DLitt (Macquarie), Hon DSc (Economics) (Sydney), FCA, FRSN

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Richard Holden

Professor of Economics

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Whether or not your own business – or your own employment situation – was impacted directly, nobody could ignore seeing the financial impact of COVID-19 start to unfold last year. Podcast host Ginger Gorman reviews her 2020 interview with Economics Editor for the Sydney Morning Herald Ross Gittins, who stated that Australia’s recession was “completely different” to anything before. Ahead of the Federal Budget, let’s see how his predictions and commentary stack up in 2021 with commentary from Professor of Economics at UNSW Business School, Richard Holden.   

Ryan (Cafe Owner) (00:06):

I thought I was immune to it in a sense I didn’t think it was going to blow up to what it blew up to. And I honestly thought it would just blow over. And it didn’t.

Ginger Gorman (host) (00:16):

I really didn’t. Let’s face it. None of us are ever going to forget 2020. That was Melbourne café owner, Ryan. He was just one of tens of thousands of Australians who spent the year trying to operate a business under some of the toughest circumstances in decades.

Ginger Gorman (host) (00:38):

But whether or not your own business or your own employment situation was impacted directly, nobody could ignore seeing the financial impact of COVID-19 start to unfold. Remember that footage of hundreds of masked Australians lined up at Centrelink after becoming suddenly unemployed.

Ginger Gorman (host) (00:57):

This might be the first real recession I really remember in my adult life. There was the 2008 global financial crisis, of course, but Australia came out of it relatively unscathed. Or is that just the wisdom of hindsight?

Ross Gittins (01:14):

One of my advantages is that I’m so old that this is the fourth recession that I’ve worked through. Because I’ve been on both sides of three recessions, I don’t know where the jobs will come from it. Come back and see me in two or three years time, and I will look up the figures and tell you where they did come from. Because what I do know is that they do come. We’ve had recessions before and we’ve lived to tell the tale, previous recessions. We will nonetheless live to tell the tale.

Ginger Gorman (host) (01:51):

Ross Gittins is the Economics Editor of the Sydney Morning Herald and a Fellow of the Academy of the Social Sciences in Australia. He spoke to Seriously Social in 2020, just when the economy was straining under the onset of the pandemic. And he helped us to wade through some of the financial implications of the recession brought on by COVID-19.

Ginger Gorman (host) (02:13):

A year on, I thought it would be really interesting to see if he was on the money, if you’ll pardon the pun. To help me do that, I’ve got Professor Richard Holden with me. Richard is an economist from the University of New South Wales, and you’ll hear him on the news quite a bit. He’s also the incoming President of the Academy of the Social Sciences in Australia. This is Seriously Social, I’m Ginger Gorman, and I’ve tasked Richard with helping us unpack exactly what did happen with the COVID-19 recession, and where that leaves us in 2021 and beyond.

Ginger Gorman (host) (03:02):

So let’s start with jobs. Ross Gittins told me that the sector to watch was hospitality. In the last 50 years, that’s where the increases in jobs have come from. So how is the services sector faring after 14 months of COVID-19 in Australia? Anecdotally, it might seem like it’s done pretty well, at least recently. Since Victoria’s second-wave lockdown last year, Australia has only seen the occasional case of community transmission, and the resulting lockdowns have mostly been local and short.

Richard Holden (03:36):

As an economist, I like data rather than anecdotes.

Ginger Gorman (host) (03:38):

Look, I take Richard’s point. But as a journalist, I love anecdotes. So I took my recorder into some cafés when I visited Melbourne recently, and I learned that the recovery has been a bit more complicated for café owners than I’d realized. Here’s Ryan again.

Ryan (Cafe Owner) (03:56):

Yeah, I used the term a false economy. The first four, five, six days of reopening was gangbusters. And it’s kind of like people bottlenecking. It’s like if you’re not allowed to have something for nine months, and then you’re told you can have it, you rush out and you get it. So we were quite busy, and it was a great vibe. It great.

Ryan (Cafe Owner) (04:19):

But yeah, after the first week, you still see the same regulars, but not at the high frequency that you used to. People, A, bought coffee machines, and mastered the art of cooking breakfast for themselves.

Ginger Gorman (host) (04:34):

And then what happened after that great fanfare? November, everyone’s come back, you think it’s going to go well. How’s it panning out now?

Ryan (Cafe Owner) (04:42):

Well, your customers tell you how it’s panning out for them as well. Generally comes with an apology, “Sorry you don’t see me as often anymore, I’ve learnt how to make coffee. I can smash avo myself now.”

Ryan (Cafe Owner) (04:54):

Side note, I always thought it was a weird thing that people couldn’t spell their own avocado, but it paid my rent, so I was happy with it. And now, people apologize for not coming as often. I’m thinking that maybe a lot of them are working from home, so their routine’s changed, and you’ll see people for lunch. I also noticed the average spend has dropped a little as well. So, trying to accommodate to please your customers and fill your till.

Ginger Gorman (host) (05:22):

This is interesting on a number of levels. So people are now working from home more, but it sounds to me like they’re not spending as much money because they either have it, or they don’t want to, and they’re cautious in case there’s another lockdown.

Ryan (Cafe Owner) (05:36):

Yeah, absolutely. Look, everyone’s got their own story, and they will try to tell it to you. It’s individual. For 20 years I’ve tried to work out why February is the quietest month in Melbourne. And we all have different theories on credit card statements and Christmas and whatnot. I’ve stopped trying to predict what happens now and just let it unfold naturally. But I can… there’s a massive line in the sand, and breakfast during the week is over in Melbourne, sadly.

Ginger Gorman (host) (06:09):

So, what does Richard Holden say about this?

Richard Holden (06:13):

The hospitality sector’s still under a great deal of pressure. If you just casually look around, having said I don’t like anecdotes, if you just casually look around and look at how many of your local favorite little hole in the wall local restaurants, your local Thai place, or maybe a local coffee shop, have suddenly shut down, I think that’s a signal of what the data might actually say.

Richard Holden (06:36):

And as I say, there are whole sectors here, so tourism still a really big deal. The International border is going to remain closed for a considerable period of time, well we don’t even know how long more. International student numbers are still down materially. That cost the economy about $10 billion last year, it’s likely to be more in 2021. That’s significant, that’s real money. And so there are a whole number of sectors that we’re waiting to see if they’ll bounce back, in addition to seeing what happens to those potential zombie firms.

Ginger Gorman (host) (07:08):

The services sector, education, tourism, these are really important parts of our economy. So where are the jobs going to come from now that we are apparently bouncing back from the worst of it? Fingers crossed.

Richard Holden (07:21):

It’s very hard to know what’s just straight recovery and what’s a trajectory for future growth. The services sector’s such a big part of the Australian economy that if the jobs don’t come from the services sector, then they’re not going to come from anywhere.

Richard Holden (07:34):

We’re not all of a sudden going to stop manufacturing cars or refrigerators again. There may be some possibility in certain important but niche areas like medical technology or something like that, and that’d be very exciting. But that’s not going to put hundreds of thousands of Australians back to work, so it’s going to have to come in the services sector, and so it will come back. But we’ll have to wait to see what’s the bounce-back versus what’s the growing of the new base, and getting used to the new normal.

Ginger Gorman (host) (08:06):

Why, from an economist’s point of view, is the services sector the crucial one to watch in terms of recovery?

Richard Holden (08:15):

I think there’s a couple of points. One, it’s just such a big percentage of the economy and of jobs. I think the other thing is that it’s a really important step on the ladder for a lot of young people. It’s where a lot of young people get their start. And we know from voluminous research around the world, that if young people come into a bad labor market when they finished school, or if they finish TAFE or they finish university, it’s really at all levels of education, if people come into a bad labor market, even if it’s a one-year recession, that has a permanent effect, this is what’s known as labor market scarring. And it has a permanent effect on their career trajectories and their lifetime earnings. And so if we don’t see jobs coming in where young people are more likely to get jobs, then that’s going to have a really big effect on them for the rest of their lives. And that’s of great concern.

Ginger Gorman (host) (09:06):

Ross said this too, last year. He pointed out that when companies have to tighten their bootstraps to avoid having to sack longtime employees, they have to stop hiring new ones.

Ross Gittins (09:18):

Employers fix their problem in recessions by canceling their annual intake of people at the entry level, people just leaving school or more these days, just leaving university. So you say, “Well, look, I don’t want to have to lay off all my staff, that’d be very hard on them. So what I’ll do is I’ll run the numbers down by natural attrition. And that says when people leave, they’re not replaced. But the other thing it says is, we’re certainly not going to go out and hire anybody.” And that is what employers do almost automatically in every downturn.

Ross Gittins (09:59):

But when you think about it, the people who are most effected by that are people who are trying to enter the workforce. We felt that we got through the global financial crisis without having a recession, unlike just about all the other rich countries, which is true. But if you look at the figures very closely, you discover that still meant that young people leaving the education system bore the great burden of the downturn that was the global financial crisis, because they took a lot longer to find jobs.

Ross Gittins (10:40):

That’s what happens in every recession. It even happened in the GFC, which we say, wasn’t a recession. I don’t say it, but everybody else does. And so there is just no doubt that it’s the young people who bear, as a class, who bear the heaviest burden during a recession.

Ginger Gorman (host) (11:03):

Alicia was one young Australian who had saved hard to open a food popup in Melbourne. In a massive stroke of bad luck, she was only about six weeks into being open for business. She was getting great reviews and setting up supply chains when COVID hit, and it all came crashing down. She had to make other plans fast.

Alicia Twohill (11:24):

All that hard work was just down the drain, and I was left with no employment. And yeah, I think I was in a bit of a shock at the time. I always think I can get back on my feet, but there was not any prospects for me to move anywhere, really.

Alicia Twohill (11:44):

I had just hired probably about 10 people to work as popup chefs. And a lot of people who were from migrant background who were relying that with their 20 hours a week of work that they were allowed to do on visas, and that kind of thing.

Alicia Twohill (11:59):

Once the popup was over, I had them actually messaging me being like, “Are you doing anything? We can’t find work. We have nothing. We’re not able to get Centrelink, we’re not able to get government benefits. My parents can’t send money over. Do you have anything going on?”

Alicia Twohill (12:17):

And I had to just like, “Sorry, I have nothing. I’m not even… I don’t have a job at the moment.” At the end of the day, I had to almost just settle with the idea, okay, I’m moving back in with my parents. I’m lucky enough that it’s a good situation there, and we can have a comfortable bed and good food and all of those kinds of things, and live in Canberra.

Ginger Gorman (host) (12:38):

Alicia’s dad, John, was put in the position that so many Australians with adult children have found themselves in, opening their homes back up to their kids.

John Twohill (12:48):

I think that people just assume that this was just a temporary thing, it would go away and everything would be back to normal. I had no difficulty myself, but then again, we’re pretty accepting. And Alicia is, most of the time, very easy to live with.

Alicia Twohill (13:05):

I love that.

John Twohill (13:09):

We were also used to these strange outbursts that she would have from time to time.

Alicia Twohill (13:17):

That was me feeling bad.

John Twohill (13:19):

Yeah, she would, but I could see why she would feel that way.

Alicia Twohill (13:23):

It was never… I never thought it was going to be a long-term thing.

Ginger Gorman (host) (13:27):

Happily, Alicia had some other skills to fall back on, and she’s managed to make the best of an undoubtedly devastating setback. But what about the bigger picture? Is the recession really over? Here’s Richard Holden again.

Richard Holden (13:41):

It’s been really, really tough on young people, and I’m afraid it will continue to be until we make real progress with the vaccine rollout. And that’s not just here, that’s about the vaccine rollout around the world going well. And even though the US and the UK are doing well, and Israel’s doing well, and some countries in Europe are really getting their act together, you’ve got to think about what happens when the Chinese vaccine doesn’t seem to be working that well. Is India going to be able to vaccinate nearly one and a half billion people? That’s just a logistical challenge that’s almost unprecedented in human history. And if the whole world isn’t properly vaccinated, we’re going to have real problems, and they’re going to fall disproportionately on young people, unfortunately.

Ginger Gorman (host) (14:26):

And it’s also interesting thinking about the parents of all those young people trying to guide them through an experience which they have no experiences of themselves. They’ve got no yardstick here. These are not the kinds of things that their parents taught them. We don’t know. In our lifetimes, we haven’t had a pandemic.

Richard Holden (14:45):

No, it’s exactly. It’s hard enough telling people about Year 10 circle geometry or something that, and trying to remember what that was like, let alone, “When I was your age and we had a massive global pandemic.” That’s not something that people have had experience of, as you say.

Ross Gittins (15:00):

This will be a much harder recession to get out of than previous recessions.

Ginger Gorman (host) (15:06):

That’s what Ross had to say last year about Australia’s prospects of climbing out of recession.

Ross Gittins (15:12):

It’s almost 30 years since our last recession. That means that most people under 50 have never consciously lived through it. They might’ve been 10 or 12 at the time of the last one, so they don’t have an experience of that.

Ross Gittins (15:27):

What I know is that people hate recessions. At the moment they hate the virus and the lockdown, but once we get on top of that, it’ll be the recession that they hate, because they will see that they’re not getting pay rises, it’s hard to get a job, they know friends who lost their jobs and are still searching for them. Or they’ve got children who haven’t been able to find a job. It’s a big worry for people leaving education.

Ross Gittins (15:55):

And the other thing, and this is a sort of iron rule of all recessions, and that is, getting into it is a lot easier than climbing out of it. You lose all the jobs, there’s a fall in employment and an increase in unemployment that happens reasonably quickly. And then it takes years for you to get back to that level of employment that you were previously at.

Ross Gittins (16:20):

That’s the hard part, that’s the grind, but that’s also the bit that the government has most ability to do something about, if it is of a mind to, and if it’s not prepared to live with high levels of unemployment.

Ginger Gorman (host) (16:41):

Employment’s a tricky one. At first glance, it looks a lot like Ross predicted, that it would take longer to bounce back than it actually has. But we still don’t really know what the fallout from the end of JobKeeper will be. And then, how we view our current employment figures depends on what you think we should be aiming for. Back in the present day, here’s Richard Holden again.

Richard Holden (17:06):

Roughly speaking, we’re at 5.6% unemployment. And we were at, say, 5.2% coming into the pandemic. So, close in numerical terms.

Richard Holden (17:16):

Of course, underemployment was a big issue before the pandemic hit, and it’s at least as big an issue now, but it has bounced back. And things like looking at the total hours worked in the economy is a pretty good way of thinking about getting at the underemployment aspect of it as well. And that has bounced back well, but it’s really back to a level that was insufficient to drive upward pressure on wages. That’s 0.1.

Richard Holden (17:41):

And secondly, the difference between 5.2% and 4% unemployment is really, really big. That’s a lot of people. We’re talking about in the hundreds of thousands of people not having a job who could have a job, and possibly more.

Richard Holden (17:59):

And that’s just got a huge, both financial and economic, but human toll to it. And so, some people say, “Well, we haven’t had 4% unemployment, or we only touched it once in many people’s lifetimes.” So if you’re 45 or something, it’s only happened for a brief moment in our lifetime.

Richard Holden (18:18):

But we know from overseas experience, it wasn’t until the UK got unemployment under 4% that wages started rising. It wasn’t until the US got unemployment down into the mid threes that wages just started rising.

Richard Holden (18:31):

And both Treasury and the Reserve Bank think that we need to do maybe not quite as low as the US, but we need to have unemployment down around 4% or even lower to get wages moving again.

Ginger Gorman (host) (18:43):

So not long after I recorded this chat with Richard, the government changed its tone on the unemployment levels. Seems like they will aim for an unemployment figure in the range of 4% to 5%. And I guess future Richard will be pleased about that job.

Ginger Gorman (host) (18:58):

JobKeeper is one of the components to this we can’t really tie up into a neat bow. It worked, kind of, for some businesses, but not for others.

Ginger Gorman (host) (19:07):

Ryan, the Melbourne café owner, told me that it made it hard to get full-time hospitality workers when they could earn $700-plus a week for working just two shifts. And what about those businesses that still haven’t recovered? Without JobKeeper, will they have to lay off staff?

Richard Holden (19:28):

I understand, and my colleague economists understand JobKeeper can’t go on forever, that had to taper away. We can debate whether it should’ve tapered away when it did, or whether it should be extended longer. I think part of that taper was premised on a vaccine rollout that was going to go a lot better than it did.

Richard Holden (19:44):

In fact, the federal budget papers last year said that the benefit of a vaccine rollout could be as much as $34 billion a year. Another way to say that is that the cost of the fact that we’re probably a year behind schedule is, well by their own numbers, $34 billion a year.

Richard Holden (20:00):

I really hope that from a fiscal perspective, the government doesn’t perform some kind of quasi austerity dance, and that they actually focus on growing the economy rather than balancing the budget in the first instance.

Ginger Gorman (host) (20:12):

If you were Treasurer for the day, what measures would you be putting in place this Federal Budget?

Richard Holden (20:17):

Well, let’s start by noting what a terrifying prospect of me being Treasurer for a day is, but I’ll go with the hypothetical.

Richard Holden (20:25):

What I’d like to see is really meaningful investment in social and physical infrastructure. Social infrastructure includes everything from better availability of childcare, making pre-K education available to all Australian households, making sure that we have the right kind of education and training programs and expanding that. And it’s not like nothing’s been done in any of these areas, but I would like to see a lot more done in all of those areas on the social infrastructure side.

Richard Holden (20:55):

And then on the physical infrastructure, again, it’s not that nothing’s being done, but the government’s been touting numbers like $100 billion dollars over 10 years. That’s just really not a lot of money. Now, there are real issues about how many people you can get to work on how many buildings sites, and how many cranes you can put in place, and how much construction can get done. Those are all real, but I think that there’s been a general lack of ambition for nation-building projects. And one of the things that we learned from the last decade or so is we had really high levels of population growth, really high levels of net migration to Australia. We had population growing above 1% a year, and we didn’t have the infrastructure, the physical infrastructure, as well as the social infrastructure to keep up with that.

Richard Holden (21:39):

And we’ve had a really big price for that in terms of congestion, in terms of housing affordability, in terms of access to services and so on. We just need to do better on that front. And I understand that it’s not easy, but if government was easy, anybody could do it. And the point about competent management, and both sides of politics like to tout their credentials as good economic managers, and good at getting the execution right on things. Let’s see it.

Ginger Gorman (host) (22:05):

This is Seriously Social. I’m Ginger Gorman. And even if you’ve figured out how to smash your own avo, maybe have brekkie at a café now and then anyway.

Ginger Gorman (host) (22:15):

Next time in our second bonus episode for this season, we’ll check back in with Australia’s tourism industry and see how we’re traveling, literally and figuratively, this year.

Ginger Gorman (host) (22:27):

Remember, if you like what you’re hearing, we’d love you to share this episode with your friends or colleagues, or connect with us on our socials. You can find it all at seriouslysocial.org.au.

Ginger Gorman (host) (22:39):

See you next time.

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