Blog|3 June 2021
This economic recovery is different, but why?
The economic fallout from the pandemic has thrown economists a number of curve balls. The usual rules about recessions, with business investment falling sharply and personal consumption holding relatively steady, have been overturned. In countries such as Australia, New Zealand and China that have been able to keep COVID-19 at bay and sustainably re-open (a clear pre-requisite for a lasting recovery), the return to economic normality has also thrown up some surprises—the rebound has been remarkably strong, with pre-COVID levels of employment and GDP reached within a year of the initial lockdowns.
So what has made this time different from ‘traditional’ recessions? Using Australia and NZ as case studies for where the recovery is well-entrenched, it can partly be explained by the amount of fiscal and monetary support that the authorities have supplied. Budget deficits have increased sharply, and central banks have pulled all of their monetary levers. Under normal conditions this amount of support would generate a substantial amount of additional activity in the economy, particularly with much of it frontloaded given the focus on direct transfers to households and businesses.
But the policy response can’t fully explain the speed and timing of the rebound. The high frequency indicators and confidence surveys in Australia and New Zealand troughed in April/May 2020, months before the majority of the fiscal supports hit the economy.
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