An estimate of the economic impact of COVID-19 on Australia

Predictably, labour markets appear to have been severely impacted by pandemics.  The US Bureau of Labor Statistics’ records the rate of unemployment rising by a full third from 7.2 percent (2008) to 9.6 per cent (2010) before and after the Swine Influenza pandemic and by over half from - 3.7 percent (1968) to 5.9 percent (1971) - before and after the Avian Influenza pandemic.  China’s Ministry for Human Resources and Social Security similarly records the official unemployment rate rising by a quarter from 3.6 percent (2001) to 4.5 percent before and following the SARS pandemic.

Key findings

This section discusses the scope for government expenditure to offset the impact to the economy from shocks to private consumption, business investment and exports.  The methodology draws its data from Table 1 and applies these to the framework described in the introduction.  Trade is excluded as changes in exports and imports are likely to net out.

A plausible upper bound scenario would see  Australia’s private consumption collapse by up to 20 per cent on 2019 levels (total $1.1 trillion) which would represent a loss of $220 billion to GDP with a consequent reduction in business investment of up to 50 per cent ($60 billion); a total loss of $280 billion to the aggregate economy and a contraction of ãbout 15 percent.  Consequently, a programme of government expenditure of $300 billion plus would be required to offset these shocks.  By way of context, by 7 April the Australian Government had announced $213 billion in economic stimulus spending in response to COVID-19 (ABC 2020).

Conclusion

This study finds that the economic impact on Australia of COVID-19 is likely to be deep but is moot as to duration.  Other studies of earlier pandemics not only found their economic impacts to have been deep but also remarkably prolonged.  Economic modelling by Smith (2009) of an influenza pandemic in the United Kingdom with COVID-19’s profile (which is a clinical attack rate of 2.5 in 10,000 people globally and a case fatality rate of 6.2 per cent) estimates an impact on GDP of -6.5 percent.  Similarly, Barro (2020) estimates an impact on GDP of -10 percent from the Spanish Flu even after adjusting for World War I. 

Jorda’s (2020) study of historical pandemics focuses on the rates of return on assets (land, labour and capital) following pandemics with over 100,000 deaths as their key economic metric.  Their principal finding is startling: after pandemics the rate of return declines for decades, reaching its lowest point of -1.5 percentage points some 20 years later, and only returning to its pre-pandemic rate 40 years after the event.  They attribute this extended recovery period to the pandemic’s detrimental impact on the labour supply which increases the real wage and which, in turn, induces its substitution with capital.  In sum, all of these studies point to an unfortunately long road to recovery.