As a general rule, any time you need to use the phrase “since the Great Depression” things are not going well. Right now, of course, things are not going well. They are not just going badly, they are going badly quickly.
Through my lifetime there have been three “worst since the Great Depression” times for the economy – the early 1980s, the early 90s and the global financial crisis. In each case we never really got close to experiencing dramatic declines in production and income that happened during the 30s.
Out of those three cases the worst our GDP per capita ever fell in a year was 2.2%. By contrast, during the Depression, there were three consecutive years where it fell by more than 3.5% and one where it fell by more than 10%.
Most of us have lived in a time of moderation.
Consider that from 1920 to 1946, Australia’s annual GDP per capita either rose or fell by more than 4% 14 times; over the past 50 years it has happened just once.
Right now it would not be a shock if such a fall occurs in the June quarter alone.
In the US things have ground to a halt such that the total number of unemployed has increased by more than 50% in a week.
When such things occur, even comparison with the Great Depression fails.
Here in Australia the numbers are going to be just as bad. The numbers of people this week applying for Newstart this week are unprecedented (though not unanticipated) and Westpac economists now predict our unemployment rate will hit 11% by June.
Were that to happen the unemployment rate would have risen 6%pts in four months. The previous biggest four-month jump was in 1982 when unemployment rose 2.4%pts, from 7% to 9.4%.
The Great Depression was as bad as it was because economies around the world went backwards for three to four years. Australia’s GDP per capita in 1931 was 20% below what it was in 1928; in the US it fell 31% from 1929 to 1933.
Were our GDP per capita to fall by 20% that would take us back to 2001 levels – 20 years of growth wiped away.
Fortunately, things are a bit different now from the 30s.
Firstly, the world is not on the gold standard as it was in the 20s and 30s, so central banks have been able to engage in an extremely strong monetary policy response.
And secondly, John Maynard Keynes has already written his General Theory, so we know that fiscal expansion, not austerity, is the best response.
This, of course, is a different economic crisis – people are unemployed because the government has in effect mandated that their workplaces close. And so the hope is that when the crisis is over everything snaps back into place.
But generally it takes longer to recover than it does to fall.
It took two years of the Great Depression to lose 20% of GDP per capita and five years to make it back. During the 90s recession it took three years for the level of employment to fall from 59.6% to 55.5% and more than seven years to get back to the pre-recession level.
And in this instance we need to consider the virus and the response of governments around the world. The global economy is only as strong as the weakest link. And right now the US, led by Donald Trump, is in a pitiful state.
Until it is safe to return to normal business – and crucially until we feel safe – we will not see much recovery. But importantly, until we can say the same about other major nations, we will not see the global economy recover.
It may feel as though Trump’s incompetence does not affect us but it very much does.
All facets of our economy are affected – almost beyond comprehension. But it is all irrelevant until the concerns about our health – and the health of those in our major trading partners – are at an end.
Greg Jericho writes on economics for Guardian Australia