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Australia Scott Morrison says the coronavirus recession is '30 times worse' than the GFC. Is that accurate?

01:06  02 june  2021
01:06  02 june  2021 Source:   msn.com

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After more than eight years proclaiming the need for austerity to reduce national debt and the budget deficit, the Coalition Government has been confronted with a sharp economic downturn, triggered by the global pandemic.

The Government's response has been to stimulate recovery by committing to an unprecedented level of spending, which, it says, is justified by the severity of the recession.

Referring to the budget, Prime Minister Scott Morrison told Parliament: "It also comes at a time when we know that the economic impact on the global economy means that this pandemic recession is 30 times worse than what we saw in the global financial crisis (GFC)."

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Is Mr Morrison correct? RMIT ABC Fact Check investigates.

Mr Morrison is comparing apples and oranges.

Economists contacted by Fact Check said Mr Morrison's approach of comparing the size of the GDP contraction in each of the two years was not the normal way of assessing two economic periods.

Experts say the claim is misleading, confusing and probably wrong in magnitude, although the numbers are not yet in for the current downturn.

They also say that the GFC and the current pandemic recession are fundamentally different in nature.

They had different causes and effects, and the possible V-shaped recovery that is being forecast for the current recession is stronger than occurred after the GFC.

If the recessions are compared using the orthodox style — as a turnaround from pre-recession growth — the pandemic downturn of 2020 could turn out to be roughly double the magnitude of the GFC, or, arguably, similar.

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On May 12, the day after the 2021-22 budget, Mr Morrison told Parliament that the Government's big-spending approach "recognises … that we understand the times that we are in right now":

"Those times are that we have a global pandemic that is not better but worse than it was a year ago — a global pandemic that has raged through the developed world and is now raging through the developing world as we speak," Mr Morrison said.

"It also comes at a time when we know that the economic impact on the global economy means that this pandemic recession is 30 times worse than what we saw in the global financial crisis.

"So it is a significant and very difficult time in which we are putting together this recovery plan."

He made the "30 times" comparison in interviews the same day with the Nine Network's Today program and radio station 4BC, and again in Parliament the following day in response to questions from the Opposition.

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Mr Morrison made similarly-worded claims in October 2020, not long after the Organisation for Economic Co-operation and Development published a report forecasting a 4.5 per cent contraction in global GDP for calendar 2020.

Addressing the National Press Club on October 1, Mr Morrison said such forecasts indicated the pandemic downturn would be "45 times worse" than the GFC.

And on October 7, the morning after the delayed 2020-21 federal budget, Mr Morrison provided an insight into the thinking behind his calculation when he was interviewed by the Nine Network.

"I mean, the global economy is going to fall by 4.5 per cent and during the GFC it fell by 0.1 per cent, so this is 45 times worse," he said.

Gross Domestic Product is defined as the total production of goods and services in a country.

The Reserve Bank of Australia explains that it can be measured in volume output (the amount of product produced), or price (the dollar value of goods produced), or expenditure on goods and services.

When it comes to measuring global GDP, a 2007 paper from the RBA says that each country's output needs to be weighted appropriately.

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Two common ways of determining country shares in world output are to convert each country's output into a common currency, either by using purchasing power parity (PPP) exchange rates or by using market-exchange rates.

"These approaches can result in different shares for individual countries, with measures based on PPP exchange rates typically giving a high weight to emerging countries like China and India," the paper said.

For example, world GDP grew by 5.5 per cent in 2006, according to the PPP measure,  compared with 4 per cent using market exchange rates, it said.

The OECD, whose 37 member countries are all advanced economies, calculates changes in global GDP. Other international institutions that do the same are the International Monetary Fund and the World Bank, which are both linked to the United Nations and have 190 member countries.

Australian institutions, including the Reserve Bank and the Federal Treasury, commonly refer in their publications to IMF figures for changes in world GDP. The IMF's estimates are also included in the federal budget papers.

These are typically IMF figures produced by weighting countries, according to PPP exchange rates, but the IMF also publishes tables based on market exchange rates.

Mr Morrison did not specify any source. As the budget papers refer to IMF calculations using PPP exchange rates, Fact Check will focus on the IMF's PPP figures in assessing his claim.

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Since the pandemic began in early 2020, the IMF has published three World Economic Outlook reports.

They were in April 2020, October 2020 and April 2021, and two updates, in June 2020 and January 2021.

The estimate for the fall in global GDP for calendar year 2020 has varied over those five publications, between 3.0 per cent and 5.2 per cent.

The latest report (titled April 2021, released in March) estimates that world GDP fell 3.3 per cent in 2020. The same figure appears in the recent federal budget papers.

The IMF report also says that in 2009 — the worst year of the GFC — the world economy contracted by 0.1 per cent, the figure mentioned by Mr Morrison in October 2020.

Associate Professor Graham White, of the University of Sydney, told Fact Check he was nonplussed by the Prime Minister's claim that the downturn triggered by the pandemic was "30 times" worse than the GFC.

He says the traditional manner of comparing economic periods would be to examine changes in GDP over time.

That includes the variance of GDP growth rates from high to low in each period, and not by comparing the low point in the growth cycle (or high point) against another period.

To do otherwise, he says, would overlook relevant issues.

"As an economist, I would typically look at how much the growth rate has fallen — from top to the bottom — and compare it to whatever other period I'm looking at," Dr White said.

"I would also look at the trend rate over a longer period and consider what growth rates were achieved afterwards, which is also relevant to policymakers.

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“Now the fall in the growth rate — from top to bottom — is probably bigger in the pandemic than it was for the world during the years of the GFC. So yes, okay — but, by itself, what is this supposed to tell us?”

This method was used by economists from the Federal Treasury in a 2012 paper reviewing the comparatively good performance of the Australian economy during and after the GFC.

Figures from the April 2021 IMF World Economic Outlook report show that global GDP fell from 3.0 per cent in calendar 2008 to -0.1 per cent in 2009, a turnaround of 3.1 percentage points.

Measured over two years, given that the global shock from the GFC began in the second half of 2008, the turnaround was 5.6 percentage points.

And the Treasury paper says annual growth figures "disguise the speed and extent of the decline in the second half of 2008".

"In through-the-year terms, world growth fell from 3.8 per cent in the June quarter 2008 to -2.8 per cent in the March quarter 2009, a 6.6 percentage point turnaround," the paper said.

During the pandemic, whose economic impact began early in 2020, the IMF report estimates that global GDP fell from 2.8 per cent in 2019 to -3.3 per cent in 2020, a 6.1 percentage point turnaround.

Depending on which period is used to assess the GFC, the pandemic downturn in 2020 could turn out to be roughly double the magnitude of the GFC or arguably similar.

Professor John Quiggin, of the University of Queensland’s School of Economics, told Fact Check the "30 times" claim is nonsensical and the calculation illogical.

He noted that if the growth rate in 2009 was zero per cent, then "you'd get the conclusion that the (current) crisis was infinitely bad".

Independent economist Saul Eslake, of Corinna Economic Advisory, also queried the use of the figure.

Mr Eslake says the global recession brought about by the pandemic has certainly been "significantly worse" than the one arising from the GFC, but it is "almost certainly not [worse] by a factor of 30 — and probably not even by a factor of 15".

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Professor Jakob Madsen, of the University of Western Australia, says the Prime Minister's comparison was "amateurish" and "ludicrous" and demonstrated the inherent danger in measuring changes from rates of figures close to zero.

"It's just nonsense," Professor Madsen said. "People must not do that, but you see it all the time."

Associate Professor Mark Melatos, of the University of Sydney, says the "30 times" comparison is "not a very useful description".

He noted the global financial crisis arose from within the financial system and was "very different in nature, not just size" to the pandemic recession.

By contrast, the pandemic has been an external shock.

"In the GFC case, people chose to reduce spending because they were scared," Dr Melatos said.

"In the COVID recession, people were forced not to spend, even though they could afford to."

"So, yes, the contraction in real GDP is (roughly) 30 times greater, but that's like saying an orange is 30 times larger than a grape.

"True, but not particularly useful [because] the two recessions are not comparable."

Using figures from the IMF's April 2021 report, world GDP rebounded to growth of 5.4 per cent in 2010, a turnaround of 5.5 percentage points. The IMF is forecasting growth of 6 per cent in 2021, which would be a 9.3 percentage point turnaround.

Professor Quiggin says that while the GFC extended across several years and the effects lingered, the pandemic is resulting in "a kind of V-shaped recession".

"Output fell sharply (last year) while [lockdown] restrictions were in place, but recovered most of the lost ground quite fast once restrictions were lifted," Professor Quiggin said.

"To be fair, that recovery was largely due to the fact that most nations, including Australia, took strong action to maintain household incomes and prevent a cascade of business failures.

"By contrast, responses to the GFC were inadequate nearly everywhere (Australia and China were exceptions) and were followed by a shift to austerity which produced a decade-long disaster."

Mr Eslake says the most recent recession has been shorter than the GFC recession, and the recovery in the past several months has been significantly stronger than a decade ago.

[Graph: GDP]

This is mainly due to the "vastly greater amount of fiscal stimulus deployed in response to it".

"The recovery from the most recent recession has also, so far, occurred more quickly, in the sense that it has taken less time to reverse the losses of output incurred during the recession," Mr Eslake said.

Dr Melatos suggests one of the fundamental differences in the two periods was that whole sectors of the economy were shut during the pandemic and certain goods and services simply could not be traded because governments ordered people into lockdowns and curfews.

"Consumers had no choice but to stop consuming some goods and, especially, services even if they wanted to," he said.

In effect, the basket of goods that underpins GDP estimates changed and shrank.

To that end, Dr Melatos suggests the use of real GDP as a measure of economic output in the current downturn may be problematic.

"In this case, it is not clear what it means to measure changes in purchasing power when people, by government decree, are not allowed to purchase things," he said.

"This may be one of those rare cases where looking at nominal GDP makes more sense."

Another factor differentiating this recession is that it has severely affected some countries that were relatively unscathed by the GFC, and there have been significant variations in economic growth rates between global regions.

India, Brazil and Argentina, for example, have endured hundreds of thousands of deaths, while east Asia has been relatively lightly affected.

The OECD says economic recovery will depend, in large part, on confidence that the spread of the virus has been contained.

This, in turn, depends on the rate of deployment and administration of vaccines in advanced and developing countries.

Borders could then re-open, stirring tourism and education (foreign student) sectors into growth.

In its April 2021 World Economic Outlook report, the IMF says that as a direct result of the "unprecedented" policy responses by many nations, "the COVID-19 recession is likely to leave smaller scars than the 2009 global financial crisis", assuming the pandemic can be brought under control by late 2022.

Principal researcher: Leonie Wood

factcheck@rmit.edu.au

  • Scott Morrison, House of Representatives, May 12, 2021
  • Scott Morrison, Today, May 12, 2021
  • Scott Morrison, Radio 4BC, May 12, 2021
  • Scott Morrison, House of Representatives, May 13, 2021
  • Organisation for Economic Co-operation and Development, Coronavirus (COVID-19): Living with uncertainty, September 2020
  • Scott Morrison, National Press Club, October 1, 2020
  • Scott Morrison, Today, October 7, 2020
  • Reserve Bank of Australia, Economic growth
  • Reserve Bank of Australia, Statement on Monetary Policy, Measuring global growth, August 2007
  • Budget Paper No. 1 2021-22, International economy forecasts
  • International Monetary Fund, World Economic Outlook Reports
  • International Monetary Fund, World Economic Outlook, Managing divergent recoveries, April 2021
  • International Monetary Fund, World Economic Outlook, Statistical Appendix, Real GDP growth, April 2021
  • Tony McDonald and Steve Morling, The Treasury, The Australian economy and the global downturn Part 1: Reasons for resilience, April 2, 2012
  • United Nations Department of Economic and Social Affairs, Global economic recovery remains precarious – the projected rebound of 4.7 per cent will barely offset 2020 losses, February 1, 2021
  • Organisation for Economic Co-operation and Development, Strengthening the recovery: The need for speed, March 21
  • International Bank for Reconstruction and Development/World Bank, Subdued global economic recovery, January 2021

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