This is what a 21st century recession looks like

The single biggest economic transformation in Australia in the last 40 years has been the transition from manufacturing to services as the dominant form of employment.

In the 1970s around one in five jobs in Australia was in manufacturing. As late as 1984 it was nearly 17%. Manufacturing was the largest employer, far ahead of any other sector, in a country that made things.

But in February this year, manufacturing provided just 7% of jobs.

Now we’re a service economy instead. The “professional services” classification used by the ABS was less than 4% of jobs in 1984. Now it’s 9%. Health and social care was just over 8% of jobs. Now it’s 13.8% and climbing fast. The total number in the sector hit 1.8 million in February, a new record.

Services have grown so rapidly in recent years we’ve imported workers by the hundreds of thousands to fill demand. Nurses. Aged care workers. Cooks. IT workers. Plus hundreds of thousands of foreign students working part-time in retail and hospitality.

It’s been a similar story, to a greater or lesser degree, across the West as we’ve outsourced manufacturing to countries with lower wages and employed ourselves providing services to each other and the world. Services make up 60% or more of activity in developed economies — and even in China, the workshop of the world for the first two decades of the 21st century.

Services are also exactly where government measures to prevent the spread of coronavirus have been targeted. The recession that is now enveloping every developed economy is a services-led recession as retail, personal services, education, aviation, hospitality, arts and entertainment are forced to shut down or, if they can operate remotely, shifted online.

Last week’s survey of 1217 businesses by the Australian Bureau of Statistics confirms the slump is being triggered by the collapse in the services sector. It showed that 49% of the businesses surveyed had already experienced a negative impact.

The most common impact was a drop in local demand. Food and accommodation service businesses were the most heavily affected with 78% already reporting troubles and 96% of this group expect future negative effects. 

What’s unfolding now is thus the first recession of the 21st century economy.

The recession of 2008-10 began in the financial services sector, but unfolded in most of the world — except here, thanks to the Rudd-Swan government — like a traditional recession, pummelling the real economy in areas like construction and manufacturing.

This time around, entire service sectors are simply being closed, sending hundreds of thousands to the dole queues. The speed of that process is the other fundamentally different quality about this recession. Normally recessions unfold over weeks and months as consumers cut spending or interest rates rise and choke off investment, curbing demand, leading to job losses that further reduce demand and undermine confidence, in a vicious spiral of fear begetting fear.

There’s no spiral at the moment. Healthy industries are simply being closed. The economy was stagnant before the crisis, and it wouldn’t have taken much to send it over the edge. But it hasn’t been nudged into recession, it’s been hurled by the government in an effort to contain the virus.

What we are looking at is an economy where private demand and activity has been almost silenced — similar to the way the economies of Europe looked after World War II. It took the Marshall Plan — the then huge sum of US$15 billion — principally from the US which helped restart the economies of countries like Germany, France and Italy from 1948 onwards.

The government’s initial reaction was to treat this as a traditional recession. At the time — in the dim dark past of several weeks ago — it seemed sensible. Its first stimulus package aimed to encourage people to spend on consumer products and incentivise businesses to invest.

That’s how you normally stimulate a flagging economy. But it doesn’t work when tens of thousands of businesses that might normally use depreciation allowances are closed and their workers have lost their income.

The real fear is that the huge numbers of businesses closing will deliver a systemic shock to the financial sector as loans and and mortgages are defaulted on, and that those business won’t simply re-open, and rehire their staff, when the virus threat recedes. Instead, they’ll stay closed for good.

That’s why the International Monetary Fund’s Managing Director Kristalina Georgieva warned on Friday that there would only be a “sizeable rebound” in 2021 if nations succeed in limiting the economic damage.

“A key concern about a long-lasting impact of the sudden stop of the world economy is the risk of a wave of bankruptcies and layoffs that not only can undermine the recovery but erode the fabric of our societies,” she told reporters.

The UK government worked out that this was a different kind of recession far earlier than we did, moving swiftly to provide 80% wage subsidies (capped) not merely for full-time workers but for freelance and contract workers.

After deriding the idea of wage subsidies as impractical and dangerous last week, Scott Morrison appears to have had a change of heart, with journalists being furiously backgrounded in recent days that a wage subsidy package was being put together.

A different kind of recession requires different thinking. Otherwise there’s a real chance it may deepen into the kind of depression we thought was consigned to the history books.