The coronavirus has not only triggered an immense global public health crisis, it’s also delivered a fierce economic and financial blow. Making the policy challenge even more complex has been the brutal trade-off that, at least in the short term, sees measures required to manage the health crisis intensify an economic one, which, if badly handled, will generate its own significant adverse consequences for public wellbeing.
Facing an unholy combination of demand, supply and financial shocks, policymakers have grappled with the kind of sudden stop normally associated with financial crises, but this time unfolding in the real economy as a direct consequence of government measures to stem the spread of the virus. Policymakers must get health and economic responses right — they must manage shutdowns and stimulus.
Just a few months ago, when thinking about the potential economic fallout from COVID-19, the natural baseline seemed to be the 2003 SARS (severe acute respiratory syndrome) outbreak. This implied the cost in terms of lost activity would be significant for the most affected countries in the short term, but that after one or two bad quarters, a V-shaped recovery should be on the cards. Now, we’ve abandoned the SARS analogy. At the time of writing, the new benchmark was the global financial crisis (GFC), with International Monetary Fund managing director Kristalina Georgieva saying on 23 March that the world economy faced in 2020 “a recession at least as bad as during the GFC, or worse”.
Others have pointed to the 1918–20 Great Influenza Pandemic (Spanish flu) as a potential worst-case scenario, an event some economists have ranked as the fourth-largest negative macro shock to hit the modern world economy, behind two world wars and the Great Depression. Harvard University macroeconomist Robert Barro and colleagues (in an NBER working paper, 2020) have estimated that earlier global pandemic may have reduced real GDP per capita, and consumption in the typical country, by six and eight per cent, respectively.
The uncertainty makes it hard to gauge how bad the fallout will be, acknowledged by the Treasurer on 20 March when he announced the 2020–21 Budget would be deferred until October because it was “extremely difficult to formulate reliable economic and fiscal estimates over the next few months”.
We do know it will be bad. Early readings from China demonstrated the damage created by draconian quarantine measures, with industrial production dropping by 13.5 per cent over the year in January–February, retail sales plummeting by 20.5 per cent and fixed asset investment crumpling by 24.5 per cent. Subsequently, real-time data depicted restaurant and cinema bookings across the developed world collapsing alongside the near disappearance of international passenger airline traffic. Then business surveys reported activity in the UK and the Eurozone crashing to record lows. In just two weeks from mid-March, almost 10 million Americans filed for unemployment, smashing all previous records. In Australia, too, the first indicators of economic damage were showing up in the data flow and unsettling images of large numbers queuing outside Centrelink offices. Roughly half of the businesses surveyed by the ABS during this period said they had experienced an adverse impact as a result of COVID-19 and 86 per cent expected to be impacted in future months. The ANZ-Roy Morgan weekly survey of consumer confidence fell to its lowest point since the survey began in 1973.
Federal government support
$17.6b First stimulus package
$0.7b Aviation support package
$15b Australian Office of Financial Management investment package
$65.4b Second fiscal stimulus package
$130b JobKeeper package
$228.8b (11.8% of GDP) Total
$90b (4.6% of GDP) RBA term funding facility
$318.87b (16.4% of GDP) Adjusted total
Financial market turmoil has compounded the real economy dislocation. From early March, markets began grappling with the implications for asset prices. That reassessment prompted a series of dramatic corrections in global stock markets with market capitalisation falling by about US$24 trillion in less than three weeks. Market volatility and financial stress spiked to levels last seen in the GFC, forcing central banks to dust off crisis-era playbooks. They pushed policy rates down to the effective lower bound, ramped up unconventional programs and poured liquidity into stressed financial systems, aiming to forestall market seizures while managing the price and supply of credit. For the RBA, that involved cutting the cash rate to 0.25 per cent, introducing yield curve control by targeting the yield on three-year government debt via the purchase of government bonds in the secondary market, and deploying a $90b term funding facility to support business lending.
Meanwhile, fiscal policy has been tasked with ensuring that the frontline health sector is adequately resourced and with providing a lifeline to vulnerable businesses and households. Governments have introduced radical policies including wage subsidies, tax holidays, targeted lending and cash handouts. To date, Canberra has deployed a combination of cashflow relief for SMEs, investment incentives, direct payments to households and more generous welfare provisions. The $130b JobKeeper program, announced on 30 March, took total federal fiscal commitments (plus the RBA’s $90b term funding facility) up to an astonishing $319b, or more than 16 per cent of GDP, deployed in just a few weeks.
The guiding principles here cannot be Schumpeterian creative destruction or moral hazard concerns. Think natural disaster response or national mobilisation as macro policy faces two vital and reinforcing near-term priorities. First, prevent or at least mitigate a destructive and destabilising cascade of bankruptcies, insolvencies and unemployment. Second, safeguard otherwise viable businesses and shelter workers/households so when the crisis eases, the economy retains the capacity to stage a robust recovery.
Hear the latest analysis from Mark Thirlwell on the AICD’s weekly podcast The Dismal Science. Available on Apple Podcasts here.
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COVID-19 - Economic Impact Update, hosted by Mark Thirlwell, or go to our dedicated COVID-19 resources hub.