Will coronavirus trigger a recession (and what can be done about it)?

Is a recession on the cards with the economic contagion being spread by coronavirus? UNSW Professor of Economics Gigi Foster looks at what options are available for government and explains why there might be an economic uptick in the long-term

First of all, the definition of a recession is that you have two or more consecutive quarters with negative GDP growth, or falling GDP. And when we talk about a global recession, that means you have to somehow weight up all of the GDP numbers from all the economies in the world or some large fraction of them.

And I think the answer to that really depends on what happens over the next month or two. It’s very unclear how far this epidemic or maybe pandemic is going to spread.

And also what people’s responses are going to be both at the government level and at the individual consumer level, because those two levels are the ones at which we’ve seen responses that have the potential to flow through into supply chain disruptions, demand changes and the inability to trade, which essentially is what we would think of as causing the recession.

The last big global recession we had was characterised by big firms going out of business, people losing confidence in large pieces of the global trade network. That’s not really what’s happening here. What’s happening is that particular companies in particular regions like China are being blocked off from trading with the rest of the world.

And that blockage could be released in a moment by the Chinese authorities or the Australian authorities deciding to abandon those kinds of very stringent restrictions on travel, for example, and the city lockdowns.

So, if that were to be lifted – those sorts of bans – very quickly, we could spring back to the normal operation of those kinds of trade networks. The longer that those kinds of draconian measures are in place, however, the greater is the likelihood that those existing trade networks will be replaced or substituted away for other kinds of trading networks.

So, the fact that monetary policy has been used a lot by not only the RBA, but central banks around the world should not confuse people as to the possibility set for governments to manage their economies.

Monetary policy is only one option. Yes, we are at 0.5 as a cash rate right now. But what about fiscal policy? I mean, fiscal policy has been almost forgotten, it seems by a number of countries around the world. But certainly, there are many fiscal policy options available to the government in Australia.

If they wish to, they could give for example, a coronavirus tax break or possibly impose a tax on certain sectors of the economy that haven’t been as affected by coronavirus and spread the wealth around.

I think what we can do is take a lesson from some of the countries that have mishandled this crisis somewhat. Iran is one of them, where information flow has been extremely uncertain and slow and not transparent.

And that has had some really negative effects. So the government in Australia should be cognisant of that and should retain transparency about what’s happening, what the statistics show, and what can practically be done to address the further spread of the virus on the ground by people, and not overreact and not stir panic.

And again, remembering seasonal flu kills a lot of people every year and we don’t get into a tizzy about that. So, I think there is a large amount of this frenzy, which you see and things like clearing the market of toilet paper, that that really doesn’t bear any resemblance to the actual nature of the threat.

And in fact, what I would predict is that as a result of going through this little mini scare, we may find that for this quarter and the next and possibly the one after that, Australian schoolchildren will be coming to school more because they won’t be getting sick from other things because they’re washing their hands more, not touching their faces, they’re more cognisant of personal hygiene and worker productivity may also go up because we have fewer sick days. So, there may in fact be a bit of an economic uptick because of this scare.


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