April 14, 2020
Australian Markets Weekly: lessons from past recessions & depressions
Read the findings of our analysis of past depressions and recessions in Australia.
Analysis – The behaviour of GDP, unemployment and inflation in recessions and depressions
- The coronavirus pandemic has pushed Australia into a deep recession, where unemployment could reach a new post-WW2 high of 12% by mid year.
- Analysing past depressions and recessions in Australia – which have normally been triggered by global shocks and/or macroeconomic policy mistakes – we found that typically: (1) GDP experiences a short-lived decline in a recession taking about 2 years to exceed its pre-recession level (the decline is much steeper in a depression taking 8 years to recover); (2) unemployment rises sharply, up 2pp in a recession and 15pp in a depression, and stays high, taking 7 years to return to a pre-recession level and 13 years to a pre-depression level; and (3) inflation falls and stays low, dropping 5pp in a recession and 9pp in a depression, and taking 5-6 years to return to pre-downturn levels.
- Containment has seen a sharp slowdown in Australia’s infection rate, but a stop-start economic recovery is likely as government balances relaxing health measures against the risk of renewed infection. An unprecedented easing of macroeconomic policy should assist recovery, but history suggests it will take a long time for unemployment to return to pre-pandemic levels, while lower inflation could reduce the effectiveness of monetary policy by raising real interest rates.
The week ahead – AU labour force survey, CH Q1 GDP
- Australia. Unemployment should rise sharply in March as COVID-19 starts to weigh on the labour market. NAB forecasts the unemployment rate to rise to 5.7% from 5.1%, well above the consensus estimate of 5.4%, with employment falling by 90k. Unemployment should rise much further in April given tougher containment measures were introduced from mid-March. Weekly consumer confidence picked up last week, but remains near its all-time low. There are no important NZ data releases this week.
- International. A few European countries are tentatively relaxing COVID-19 containment measures. In China, the consensus for Q1 GDP is for a 10% decline in the quarter. Chinese industrial production is expected to rebound with the year-to-date decline improving from 13.5% in February to 9.9% in March. US retail sales and industrial production are due Wednesday, while regional manufacturing surveys should remain weak. The US earnings season kicks off and should report COVID-19 impacts on earnings. JP Morgan is due Tuesday with BofA and Goldmans due Wednesday.
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