SA economy will take years to recover from COVID-19

It will take years for the national and South Australian economies to return to full output and employment following the COVID-19 pandemic.

These conclusions are contained in the latest Economic Briefing Report prepared by University of Adelaide economists from the SA Centre for Economic Studies (SACES). Their report highlights:

• SA unemployment will rise to 10 per cent by June 2021 and remain high into 2022
• Economic output will not recover for a year or more
• High household debt will hold back consumption
• Small businesses have depleted their financial reserves
• Mining activity has remained resilient
• Winter farm output is good.

“The SA economy has followed the global and national economies into a sharp recession. The COVID-19 pandemic has brought about unprecedented changes in household and organisational behaviour, social distancing, and severe operating and travel restrictions,” says Mr Steve Whetton, Deputy Director, South Australian Centre for Economic Studies, the University of Adelaide. 

“Beyond the direct impact of lockdown measures on non-essential activities and sectors that rely heavily on social consumption, weaker overseas and interstate demand and supply chain interruptions have negatively impacted economic activity in South Australia.

“The direct impact of COVID-19 on their balance sheets coupled with greater uncertainty regarding future earnings prospects has also caused businesses to cut back their investment plans and households to cut back spending.”

“The state economy was already on a slow growth trajectory prior to the arrival of COVID-19. Taking into account COVID’s impact we expect that gross state product will fall by 4 per cent in 2020/21."Mr Steve Whetton

The South Australian labour market has been severely affected by the pandemic. Employment levels plunged with the initial lockdown and only a fraction of the losses have been recovered since the easing of restrictions in May and June. Total employment at the end of June was 4.3 per cent lower than at the end of March, while total hours worked fell even more (down 7.4 per cent). The unemployment rate rose sharply, from 6.3 per cent to 8.8 per cent. 

“But there has not been a one-for-one flow from lower employment to higher unemployment due to a larger than normal number of people being classified as leaving the workforce over this period. As could be expected, some displaced workers did not actively look for work while their normal workplaces were temporarily shut down and consequently they are not recorded as unemployed,” says Mr Whetton.

”The sharp contraction in output and incomes in the June quarter will not be entirely reversed for several quarters at least. This means that some parts of the community will have to adjust to lower incomes for an extended period and governments will need to ensure that the burden is shared as equitably as possible.

“Some economic activities will never resume.” 

There are a few bright spots amid the gloom. Mining activity has been fairly resilient so far. And the outlook for the farm sector’s winter crop this year is better than last year’s.

SACES economists do not expect a rapid ‘V’ shaped economic recovery. “At the national level the short-term outlook has deteriorated significantly with the renewed wave of COVID in Victoria. This will depress demand and supply still further,” says Mr Whetton.

There are other structural factors that will impede economic recovery.

“The domestic economy has been subdued for several years and average debt levels are high, so households have less capacity to restart their consumption than after previous recessions,” says Mr Whetton.

“In addition, while some businesses have prospered through the pandemic most have not. Many small businesses have depleted their financial reserves while getting through the closures and then funding the recommencement of operations.

“We are also set for a period of prolonged weakness in the labour market and thus in household incomes. This will tend to dampen the pace of recovery and household income growth had already been slow before COVID-19.”

South Australia can expect substantial output losses over the next year and longer due to the combined impacts of restrictions, scarring effects (e.g. bankruptcies, disappearance of some jobs, erosion of worker skills due to long spells of unemployment), and weaker external demand.

“The state economy was already on a slow growth trajectory prior to the arrival of COVID-19. Taking into account COVID’s impact we expect that gross state product will fall by 4 per cent in 2020/21,” says Mr Whetton.

“There are however great uncertainties around this, and much depends on whether or not the virus can continue to be suppressed to low levels in South Australia.

“Employment is one of the last things to recover in a recession. The unemployment rate is expected to climb to 10 per cent in June 2021, before easing only slightly to 9½ per cent in June 2022.

“The recovery will be slower than usual because the economy will not simply ‘return to normal’ but must adjust to new and still uncertain patterns of organisation and activity.”

The full Economic Briefing will be delivered to South Australian business leaders at virtual presentation on Friday 21 August 2020.