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Reserve Bank of Australia head of economics says too early to rule out Great Depression scenario

Australia faces a Great Depression scenario despite a record-high share market and a strong economic rebound from the Covid pandemic.

The Reserve Bank of Australia’s head of economic analysis Brad Jones said it was too early to discount that possibility, as Victoria’s lockdown was extended for another week.

‘Here in Australia, it would seem premature to completely rule out the possibility of an overhang of cautious behaviour by households and firms, as seen internationally following previous shocks like the Great Depression and the GFC,’ he told a Minerals Week event in Canberra on Wednesday.

Australia faces a Great Depression scenario despite a record-high share market and a strong economic rebound from the Covid pandemic. Pictured are primary school children in 1932

The Reserve Bank of Australia's head of economic analysis Brad Jones said it was too early to discount that possibility, as Victoria's lockdown was extended for another week

The Reserve Bank of Australia’s head of economic analysis Brad Jones said it was too early to discount that possibility, as Victoria’s lockdown was extended for another week

His comments were made on the same day Victoria’s Acting Premier James Merlino extended the state-wide lockdown for another week. 

At face value, Australia’s rebound from the Covid shutdowns has been remarkable with the share market and the economy now both bigger than before the pandemic began in early 2020.

During the Global Financial Crisis, the Australian share market peaked in November 2007 but it didn’t surpass those levels again until July 2019.

Shortly before the Covid shutdowns, the Australian Securities Exchange peaked in February 2020 before plunging by a third in little more than a month.

Since then the S&P/ASX200 has surged 51 per cent, this week reaching a fresh record high just 16 months after the pre-pandemic peak.

On Friday morning, the share market was trading at 7,251 points, well above the 7,197 point peak of early last year. 

Since the start of the Covid pandemic in March 2020, the S&P/ASX200 has surged 51 per cent. On Friday morning, the share market was trading at 7,251 points, well above the 7,197 point peak of Feburary 2020. Pictured is the Australian Securities Exchange in Sydney

Since the start of the Covid pandemic in March 2020, the S&P/ASX200 has surged 51 per cent. On Friday morning, the share market was trading at 7,251 points, well above the 7,197 point peak of Feburary 2020. Pictured is the Australian Securities Exchange in Sydney

Great Australian share market plunges – and the rebound

COVID: The S&P/ASX200 peaked at 7,197 points on February 20, 2020 but by March 20, 2020 it had dived by 33 per cent to 4,816.6 points. The benchmark index closed at 7,217.8 points on June 3, 2021 marking a 50 per cent surge since the pandemic low 

GLOBAL FINANCIAL CRISIS: The ASX peaked at 6828.7 points on November 1, 2007. By March 6, 2009 it dived by 53.8 per cent to 3145.5 during the global financial crisis, taking 11 years to hit previous record

BLACK MONDAY: Before the 1987 crash, the All Ordinaries peaked at 2376.88 on September 21, 1987. Following the Black Monday crash of October 19, 1987, it then plummeted 49.2 per cent by February 10, 1988 and took nine years to regain new highs, on December 27, 1996

Source: CommSec

The share market recovery from a crash, in little more than a year, is remarkable considering the rebound from the GFC and the 1987 stock market crashes both took a decade. 

Australia’s economy is now also bigger than it was before the pandemic with new Australian Bureau of Statistics data released this week showing a 1.8 per cent expansion in gross domestic product during the March quarter.

Retail spending has also surged since the end of national lockdowns a year ago with sales of some items tripling.

Clothing and footwear sales in April 2021 were 238.6 per cent stronger than a year earlier, a CommSec analysis of ABS data showed.

Spending at cafes and restaurants had also tripled, rising by 205.9 per cent, with the New South Wales government offering residents $100 worth of Dine and Discover vouchers until June 30, at $25 per hospitality visit. 

With Australia rebounding strongly from the original Covid lockdowns, Dr Jones said the main risk was a lack of business confidence that characterised the Great Depression and the GFC.

‘Researchers subsequently documented how so-called “Depression Babies” and corporate managers of the 1930s were highly risk averse throughout their lifetime,’ he said.

‘Later, business investment was found to remain persistently low in a number of advanced economies following financial crises in the decades prior to the GFC – a similar phenomenon unfolded after the GFC.’

Nonetheless, Australia’s rebound has been much faster, thanks to more than $300billion in federal government welfare spending measures. 

‘The path ahead may be different from typical post-crisis recoveries is because many Australian household and business balance sheets are in better shape than before the pandemic,’ Dr Jones said.

‘It is possible many Australian households and businesses feel more financially secure than is typically the case after a severe shock.

Retail spending has also surged since the end of national lockdowns a year ago with sales of some items tripling. Clothing and footwear sales in April 2021 were 238.6 per cent stronger than a year earlier. Pictured is Sydney's Pitt Street Mall

Retail spending has also surged since the end of national lockdowns a year ago with sales of some items tripling. Clothing and footwear sales in April 2021 were 238.6 per cent stronger than a year earlier. Pictured is Sydney’s Pitt Street Mall

‘The unusual origins of the Covid-19 shock, and the fact that in Australia at least, many household and business balance sheets are in better condition today than before the pandemic, suggests the domestic economy could follow a quite different trajectory compared to past rare disasters experienced abroad.’ 

Prime Minister Scott Morrison on Thursday announced a $500 payment for Victorians who had lost 20 hours or more of work a week as a result of the lockdown.

A payment of $325 for those who have lost less than 20 hours of work.  

The welfare measures are only available for those with less than $10,000 in the bank. 

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