How do we make sense of the economic climate in a time of great uncertainty? Economist Besa Deda unpacks the indicators as the impacts of COVID-19 are felt across the economy.
When financial markets are changing from minute to minute, and every sector of the economy is facing tumultuous times, how do economists make sense of it all?
“It’s our job to try to make sense of it,” says Deda, who chief economist of St George Bank, BankSA and Bank of Melbourne since 2008, is responsible for formulating views and forecasts on the economy and financial markets.
Economists are looking at “lots of different variables”, from hard data like retail spending as well as data and economic trends in overseas markets where the impact of coronavirus has been felt earlier. They also turn to history.
“Even though the global financial crisis was driven by very different factors, for example, we still look at past crises to get a sense of what the size of the fall and the bounce back might be.”
“We chart and model the data. We meet daily to discuss our thoughts as a team, and we are part of a bigger group [of economists] that is always talking. We speak to our customers and our customers speak to us. From these discussions we get a lot of anecdotes. Economics is not a pure science.
“There is still a lot that is unknown about the coronavirus. It’s evolving and not fully quantifiable. Economists are required to put numbers on the economic impact, but because it is evolving there is a higher degree of variability.”
Ultimately, economic recovery will depend on how rapidly we contain the virus, so the number of new daily COVID-19 infections is the best current indicator.
“While the daily rate of new cases continues to rise, then uncertainty will run high, business and consumer confidence will remain fragile and this will play out in ructions in financial markets.
“We need to see a slowing in the rise of new cases globally or a commercial vaccine materialise. Once that happens, uncertainty will ease, confidence will improve and that should be reflected in a recovery in economic activity.”
New cases in China have been trending lower since late February and have now flattened out. Deda adds. “This shows containment can work with production starting to recover in China. Whether other countries can replicate China’s success in flattening the virus’s curve remains to be seen – but it’s a sliver of hope.”
Deda says “banks and governments have a role to play in offsetting the impact of the virus and helping businesses that are otherwise viable to survive”.
The Australian Government has announced a raft of economic stimulus measures, which she says are “helpful in propping up businesses during this crisis”.
The Reserve Bank has also deployed a package of stimulus measures and promised to do “whatever is necessary”. The cash rate has been lowered by 25 basis points to a new historic low of 0.25 per cent and the bank launched quantitative easing for the first time ever.
This will assist the economy when it recovers but also in helping build a bridge between now and the recovery.
“At this stage, we anticipate that economic activity will recover in the second half of the year and that the rise in new cases will peak before the end of June. Obviously, there are a lot of risks around this forecast as the situation is still evolving. If the peak in infections gets pushed out to the third quarter, we will see a deeper downturn.
“Economies are cyclical, and everyone is stepping up to try and fight this virus. Once the virus peaks and passes, economic activity will recover and, with it, business and consumer confidence.”