Australia Seems Headed Toward A ‘Service-Sector Recession,’ And America Could Be Next

For advanced economies, the transition to the digital age where manufacturing once reigned has its downside. Because when service jobs disappear — as has been the case during the pandemic — they’re slow to come back, if they ever do. Consider Australia, which may be entering its first recession since the early 1990s.

Experts generally define a recession as two consecutive quarters of contraction in gross domestic product (GDP), and a recent Reuters survey of economists estimates that Australia’s roughly $1.4 trillion GDP contracted 30 basis points in the first quarter.

Then again, some economists surveyed see the Australian economy eking out a small 10-basis-point gain for the period, boosted by consumers buying goods at supermarkets and other merchants amid the coronavirus pandemic. “That means Australia might escape ‘technical’ recession. Again,” Deutsche Bank economist Phil O’Donaghoe, who has forecast slight growth in the quarter, told The New York Times.

The Australian Bureau of Statistics will publish the official first-quarter GDP stats on Wednesday (June 3). If the economy does indeed tip into recession, there will be some different — and significant — new hallmarks.

As noted on The Conversation, a recession that takes root now would represent Australia’s first “service-sector” recession. The numbers are certainly stark across the country’s employment landscape, with about 27 percent of jobs in accommodation and food services lost between mid-March and early May.

Australia also lost 19 percent of positions in the professional and technical services sectors, while manufacturing and construction lost jobs in the mid-single-digit percentages. The country’s pivot toward GDP built on the back of services — everything from restaurants to delivery to accounting — means that decades of progress can be undone in months. And it means, too, that in the midst of recessions, governments must shift the way they look to stimulate the economy, or at least keep businesses afloat until demand returns.

Australia is hardly alone in facing a recession that may have significant implications for the service sector. Here in America, the Institute for Supply Management’s Service Sector Index slid to 41.8 in April after rising to 52.5 in March. Generally, a reading below 50 signals contraction, the first such finding for the index since December 2009.

And if you drill down in the dismal April U.S. jobs report — which showed unemployment hitting a record 14.7 percent — you’ll find the one-month net decline was most acute in the leisure and hospitality sector. That industry lost 7.6 million positions, or almost half of the total. Professional and business services like lawyers and accountants also plunged by 2.1 million jobs, as did retail.

Such data show the challenges facing America’s services sector, which accounts for nearly 70 percent of U.S. GDP. At the same time, the Small Business Administration estimates that small businesses generate about 44 percent of total U.S. economic activity.  It stands to reason then that as small and medium-sized businesses (SMBs) go, so goes a sizable chunk of the U.S. economy.

And as we’ve noted before, more than half of SMBs that PYMNTS recently surveyed see the pandemic lasting 99 days, but most said they only have enough cash to last about 95 days even with federal aid. If those companies shutter or only survive with greatly reduced staffing, the service-sector recession looks set to worsen.