Word that could screw Australia’s recovery


All I've been thinking about is bitcoin. It has gone through the roof. The price of a bitcoin was over $A50,000 for a day or two over the weekend. I'm incredulous (although I own a small fraction of a bitcoin, so I'm not angry).

Surely when the price of a bitcoin goes over $A50,000 that is a sign of speculative insanity. I mean, bitcoin isn't really useful, not at all. This is a bubble. Surely. Surely, surely, surely.


And it's not just bitcoin. The world appears to have gone mad, because if you look at stock markets around the world, they're hitting new records too.

And all this is happening as coronavirus gets worse, mutating to become more contagious and killing more people than ever.

Here in Australia we think things are going to recover beautifully. But in the northern hemisphere, where most of the world's economy is, the dead bodies are piling up and economies are sputtering.

Are we too hopeful about the world's ability to come out of this crisis?

The World Bank just dropped a report warning about overoptimism. They say overoptimism is a usual feature of the recovery phase of recessions. We always think we will bounce back and we are usually wrong. Reality, turns out to be a lot worse than people thought.

"After the last global recession in 2009, the global economy rebounded in 2010 but, in the following years, long-term growth forecasts were repeatedly downgraded," they said. It takes a year for people to realise long-term economic growth won't go back to where it was, they argue. After that, you get a very crappy decade.

"Based on experience after past recessions, the global economy is heading into a decade beset by slowing growth and repeated growth disappointments," write the authors from the World Bank, in what they call a flagship report.


This matters for Australia because unemployment and wages both depend on a strong economy. If we have weak economic growth, we get rising underemployment and wages growth goes missing. That hurts all of us.

We saw this after the GFC, as the next chart shows. Markets roared up in 2009 but then fell over the next three years as reality turned out pretty grim compared to expectations.

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After a false dawn, reality then set in after the GFC.
After a false dawn, reality then set in after the GFC.

It wasn't until 2019 that markets got back to their pre-GFC peak. It wasn't just markets that took a long time to recover. Weak economic performance after the recession affected real life. Underemployment never went back to where it was pre-GFC, as the next chart shows.

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Even after a decade of relative stability, the Aussie job market was never the same after the GFC.
Even after a decade of relative stability, the Aussie job market was never the same after the GFC.

If you're stuck in a job that doesn't get you as many hours as you want, you can blame the 2007-08 US subprime mortgage crisis and global recession that followed. Unfortunately, the pandemic is likely to make things worse again.

From 2010 to 2020 Australia's economy was pretty ordinary. Low wages growth, rising underemployment, a general sense that things were not right.

If the economic wonks from the World Bank are right, such a phase is likely to repeat. The decade from 2021 to 2031 could be one where our global economy treads water and our standard of living does not improve much.


The pandemic crushes economic growth in two main ways. It stops companies from investing in the future. Companies are normally building factories and shops, buying vans and building new software. All these things they call capital investment, and capital investment allows the economy to get bigger in future, hiring more people to work in those factories, drive those vans, etc. But in these bad times they do capital investment more slowly.

The second way is that the pandemic crushes human capital. People who lose their jobs lose job skills, and it has also disrupted education. The pandemic caused what the UN calls the"largest disruption of education systems in history".

Around the world, people who would have finished school have not, and people who would have got degrees are instead unqualified. That slows down global growth, and it means all the countries Australia trades with will grow more slowly and be a little poorer than they would otherwise. Which also holds us back.

Right now there are few signs that people expect things to get worse. The question is this - if we make the transition from overoptimism to realising things are rubbish, when will that happen? Because when it does, you can expect markets to fall. Not just bitcoin, but many of the major markets - including the ones our superannuation is invested in. When that transition to pessimism happens, it could take a decade to reverse.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.

Originally published as Word that could screw Australia's recovery