An economy down under: Australia facing the prospect of a deep recession

Josh Frydenberg, the Australian Treasurer, announced on Wednesday that the economy is likely to have shrunk by as much as 9% from April to June.

This further decline in size, following a 0.3% contraction in the first quarter of 2020, will mean that Australia is on the verge of entering their first recession in almost three decades.

Whilst Australia will be one of many economies around the world in recession after the devasting economic impact of covid-19, economists are weary in particular given the fragile state the economy was already in at the end of 2019.

Throughout most of 2019, year-on-year economic growth was hovering between 1-2%, but this was mostly attributed to high levels of government spending and surges in consumer spending on days such as black Friday.

In reality, cracks were starting to appear with unemployment on the up, wage growth at an almost record low, and contractions in both the retail and construction sector.

Then along came Covid-19….

For now, the government has avoided the widespread unemployment seen in other countries through their innovative JobKeeper scheme which subsidises businesses and makes direct payments to eligible employees. This is due to end though in September, and in the absence of either a full return to work or an extension of the scheme, millions of Australians are likely to find themselves without a job.

A big hope of the government is that as restrictions are lifted, Australian consumers will head back to the shops and reignite the economy with a huge wave of spending. Early signs are not looking good though, with consumer habits shifting away from spending, in preference of saving instead. According to the Bureau of Statistics, the savings rate has increased from 3.5 per cent to 5.5 per cent.

With government spending looking like the only feasible tool to drive the Australian economy forwards, economists are rightly concerned about the level of debt which is accrued, as well as how long it can be maintained.

For now, the Australian government is rightly focused on getting through the current crisis which is still the medical threat of Covid-19, but the long-lasting economic damage if not dealt with effectively, could lead to a very gloomy future for millions of Australians.