Pain can be avoided with a $5bn injection each quarter
Australia’s economy will be driven as much by the policy response to the coronavirus as the fallout from the coronavirus itself.
The substantial negative impact on global trade, investment, household spending and employmentwill spark a deep and probably protracted recession in Australia if unchecked by policy innovation from the Morrison government. Unemployment approaching 7%, deflationary pressures and fresh record lows for wages growth will be the key aspects of such an economic slump.
Most if not all of this pain and hardship can be avoided. If the government outlines a plan to inject at least $5bn a quarter directly into the economy, these negative influences can be partially, perhaps fully, offset.
Fiscal stimulus of this order, directed to the household sector, would add about 1% a quarter to nominal GDP in the first instance. If the crisis lingers, the stimulus can be scaled up.
It is not clear whether the government is prepared to deliver such as stimulus, mainly for reasons of ideology.
If the fiscal package is anything less, the economy will remain very weak, unemployment will rise by around 1 percentage point by the end of 2020 and wages growth and underlying inflation will fall to fresh record lows.
– Stephen Koukoulas is the managing director of Market Economics
The government has finally recognised the correctness of the Rudd government’s response to the GFC
The Australian economy was slowing even before the bushfire catastrophe and the arrival of coronavirus. The economic costs of the bushfires, including damage to property and infrastructure, long-term health effects of smoke exposure and ecosystem destruction were massive, but the main effects on GDP will be felt by the tourism sector. The damage to Australia’s international image from widespread vision of the fires, accompanied by critical commentary to the effect that, as a climate laggard, we have brought this on ourselves, will be long-lasting.
The arrival of the coronavirus, just as the last bushfires were extinguished will have a greater short term impact on economic activity, almost certainly resulting in two or more quarters of negative growth. With an underlying growth rate of 0.5% per quarter, a 5% contraction in the 10% of the economy most exposed to the effects of coronavirus would be sufficient to reduce growth to zero.
It appears that the government has finally recognised the correctness of the Rudd government’s response to the GFC, and will follow that path, with some marginal attempts at product differentiation. It is likely that the effect on the budget balance will be substantially greater than the $10bn currently being discussed, and that the recent decline in the ratio of public debt to GDP will be reversed. In these circumstances, the massive tax cuts for high income earners, legislated for 2024-25 will probably prove unaffordable.
– Professor John Quiggin, VC Senior Research Fellow, school of economics, University of Queensland
Recession is nearly inevitable. The question is how deep it will be
It’s hard to look at the health data on Covid-19 without serious trepidation about the economic effects. The first wave – the contraction in travel-exposed sectors such as higher education and tourism – has already arrived. Treasury and the RBA estimate the impact on these two sectors alone will wipe 0.5% off GDP this quarter.
The second wave could be much bigger. If we want to avoid significant death rates among the vulnerable, we will need to take strong measures to contain the spread. As we’ve seen in China and South Korea, doing this effectively means shutting down childcare centres, schools and many workplaces for a period.
This will be a big hit to business activity and consumer spending. Recession is nearly inevitable. The question now is how deep it will be, and how long it will last.
The No 1 priority for economic stimulus in the short term is to shore up cash flow for businesses during the crunch period. We must avoid causing otherwise viable businesses to hit the wall. Tax deferrals, interest-free loans and cash payments should all be on the table.
The No 2 priority is to get cash into the hands of households in the event of containment. This is more than just a demand-response measure – it’s about ensuring that working Australians, almost 25% of whom are casual and do not have access to paid leave entitlements, are able to survive during a sustained period off work, either because they are showing symptoms, their workplace is closed or their children are at home. While Scott Morrison would prefer businesses to pay, not all will, and we must ensure that no exposed worker avoids going into isolation because they fear they can’t afford it. In these circumstances, cash handouts are both an economic and a public health measure.
– Danielle Wood, is program director, budget policy and institutional reform, at the Grattan Institute
Australians are ready to spend
The uncertainty surrounding the severity and hence ultimate economic impact of the Covid-19 virus is the most challenging feature of the virus phenomenon from the perspective of government policy-setting.
This is not a “normal” entry to an economic downturn: we are not seeing the start of a collapse of a bubble between market fundamentals and lofty expectations that weakens aggregate demand. Most Australians today are ready to spend (for example, on toilet paper!), but global supply chains are being disrupted in uncertain ways, and that uncertainty will take months to resolve.
In the meantime our government should work against public panic via transparent, practical stewardship, emphasising our excellent public health system and border controls, and promoting guidelines around personal hygiene and sensible decisions for vulnerable groups (such as the elderly) that have a clear connection to harm minimisation. The government should emphasise what we do have certainty about: eg hand-washing works (we may even see a short-run uptick in productivity and schooling outcomes due to better personal hygiene), and this virus is unlikely to seriously affect most healthy people who contract it.
Short-term targeted assistance to heavily affected industries, like airlines and tourism, should also be on the agenda.
– Gigi Foster is a professor in the School of Economics at the University of NSW, and co-host with Peter Martin of the Economists on ABC RN.
There is no substitute for decisive action by monetary policy
It will be difficult for Australia to avoid recession in the first half of 2020, with the Covid-19 shock hitting an already soft economy.
The government is looking to implement a circa $10bn fiscal package. Measures designed to directly address the incipient pandemic and its immediate consequences are obviously needed. As the global downturn deepens, the federal budget will go into deficit even in the absence of new policy decisions.
However, there is no substitute for decisive action by monetary policy. As I argue in this report on lessons from the US experience with quantitative easing, low interest rates are not a constraint on the effectiveness of monetary policy. Unlike fiscal policy, monetary policy is quickly and infinitely scalable. Monetary stimulus is relatively costless to implement and can be unwound quickly when no longer needed.
In Australia, some have argued the government has been slow to respond, but this fundamentally misunderstands the division of macroeconomic responsibility in an economy with a floating exchange rate and inflation-targeting central bank.
The government’s real mistake was to give the RBA board a licence to neglect its singular responsibility for demand management and then squib the opportunity to rein in that licence and hold the RBA more accountable.
– Stephen Kirchner is program director, trade and investment, at the United States studies centre, University of Sydney
Effective fiscal policy could see improved performance by 2021
The Australian economy is likely to experience a very weak first half. In the first quarter, this will be reflected in weaker goods and services exports due to travel bans and slower growth in China. The impact of the bushfires will also be a drag on growth in first three months of the year.
In the second quarter, economic weakness is likely to emanate from materially lower rates of household consumption growth, as disruption associated with Covid-19 constrains spending. And because household consumption accounts for almost 60% of GDP, when spending slows, so does GDP growth.
But looking beyond the first half of 2020, we expect that the economy should improve in the second half of 2020, as Covid-19 infection rates peak, global growth improves and monetary and fiscal stimulus take effect.
The government’s use of fiscal policy should play a critical role on two fronts: insulating the economy from the demand shock taking hold; and ensuring that firms and financial intermediaries can act to minimise disruption to both labour and credit markets. If it is successful on both fronts, then economic damage will be contained and the economy will be poised for a much-improved performance in 2021.
– Sally Auld is head of Australia and New Zealand economics and markets research at JP Morgan