US economic crash followed by US boom

In this issue we will examine the outlook for the US economy and how that effects the Australian Economy. There is a very good article published by the New York Federal Reserve on the 27^th of March called 'Fight the Pandemic, Save the Economy: Lessons from the 1918 Flu'. This piece is a combined work between members of the New York Fed and members of the Federal Reserve Board in Washington DC.

Non-Pharmaceutical Interventions

This article looks back through the literature of economics that have been published on this issue of the 1918 Flu. This literature was published from all the way back in 1927 and as recently as last month. The article examines the role of Non-Pharmaceutical Interventions (NPIs). NPIs are what we're doing now; things like quarantine and social distancing.

The researchers look at what different cities in the US did in 1918; what the effect of imposing NPIs were in those cities and how that effected the recovery of manufacturing employment in following periods. Back then, GDP hadn't been invented yet, so they measured everything in terms of manufacturing jobs. They found that US cities which adopted NPIs earlier by doing things such as closing theatres, closing churches and abandoning public meetings were much more successful. They were more successful in recovering their previous levels of employment after the epidemic had passed versus those cities who started NPIs late and didn't continue those interventions for a long time.

Based on this knowledge of what happened in 1918, right now Australia is doing a really, really good job. We are doing an even better job than the US. The NPIs we are doing in Australia are much more effective than in the US. We know this by comparing the rate of death per million people. The death rate in Australia is 1.65 per million people. In the US the death rate is 20 times as high at 33.2 deaths per million people. In New York City the rate per million people is 130 times the Australian level.

The strategies that the Australian government has undertaken include encouraging people to work from home, closing movie theatres, restaurants, churches, restricting large groups and decreasing international travel. Australia has been able to limit the spread of the virus to a less dangerous level than is the case in the US. This means that the Australian economy can rebound rapidly from this emergency after it is over.

The US Economy

<>In recent days we've seen the release of the first round of new forecasts for the United States economy. I have to say the outlook is pretty tough. This quarter in the US economy (the second calendar quarter) is absolutely terrible. US GDP should finish the second quarter 7% lower than it began. This is the biggest fall since GDP or the national accounts started being calculated in the US in 1948. This will be the absolute worst quarter on record.

In the third quarter, output will stabilise and then begin a very rapid recovery. US Output should increase by about 1.5% in the final quarter of this year. That growth really accelerates next year. There should be a 4% increase in US GDP in the first quarter of next year. This should be followed by a 3.5% increase in the second quarter, 2.8% in the third quarter and 1.5% in the final quarter.

After last year's growth in the US economy of 2.3%, output should fall this year in the US by 5%. Again, this is the worst number on record. Then begins a major boom for the following two years as people go back to work in the US. US growth accelerates next year to 6.3%. This should be followed by a 4% output growth in 2022. This rapid growth in the US economy will generate rapid growth in stock markets over the same period. Indeed, we expect stock markets to lead this economic growth.

The Australian Economy

Well, if that's what's happening in the US, what happens in Australia? We know that this quarter in Australia will be bad, we expect GDP to fall in the second quarter in Australia by 5%. The pace of recovery from that point depends on how rapidly our labour force can go back to work.

Should our workforce go back to work very quickly, then the loss in GDP this year will be very small – as low as half a percent in GDP – a very mild recession indeed. That would be followed by growth next year of a bit over 3%. Should our workforce not go back to work until very late in the year or the beginning of next year then our fall in output will be very large.

A late return to work of the Australian workforce should result in a fall in Australian GDP in 2020 of around 5.6%. The potential fall in growth in 2020 increases the size of the potential recovery in 2021. A 5.6% fall in Australian GDP in 2020 would be followed by an 8% increase in Australian GDP in 2021. A mid-range estimate is that output will fall by about 3.1% this year and then accelerate by about 6% next year. Output would then rise 2.5% in the year 2022.

Conclusion

Both the US and Australian economies are having a severe slump this quarter. It will be the worst quarter on record since national accounts were started in both countries. We think the Australian economy will recover. It should generate a modest decline in output this year and rapid growth next year.

We think that the US economy will have a large drop in GDP this year but a dramatic acceleration to over 6% next year. We have tough times right now, but by the time we get into the second half of the year we'll see the recovery of the economy and both the US and Australian economies. Next year both economies will be growing at boom level.