Two extraordinary events over the weekend suggest that the economic threat of the coronavirus may be far greater than the GFC, so that the government’s fiscal response will need to be greater as well, and different.
In 2008-09 the Labor government did $52 billion worth of stimulus in two packages three months apart, which the Coalition has spent 11 years condemning. It’s been lazy politics that is now biting the current mob on the backside as they prepare to announce their own fiscal response to this crisis.
But this time the stimulus does need to be different: not cash directly to consumers and infrastructure spending, as in 2008-09, but cash flow support for small businesses to keep them alive.
The big danger from this crisis is the permanent loss of thousands of businesses that can’t survive a cash famine.
In what, it must be said, was a bewildering blizzard of extraordinary events, those two weekend events were: first, by a weird coincidence the US 10-year bond yield hit 0.666 per cent on the 11th anniversary of the S&P 500 index bottoming at 666 on March 6, 2009, and second, Italy quarantined 16 million people in the north of country, including the whole of Lombardy.
The US bond yield has since recovered a bit, to around 0.76 per cent, but these levels are the lowest for a reserve currency government bond in, well … forever. The Bank of England famously produced a chart showing 5000 years of interest rates, and these are easily the lowest.
The rest of the developed world – Europe and Japan – have bond rates below zero. The Australian 10-year bond now pays 0.676, also the lowest ever.
Markets are thus predicting long-term secular stagnation and economic hysteresis, which is where the effect of an economic event persists well beyond the event itself. How, exactly, the hysteresis might manifest is difficult to say, although for one thing there are a few products like toilet paper that many consumers won’t need to buy for a while, having put a year or two’s supply in the garage.
No quick fix
Seriously though, the earlier hope that the epidemic would pass quickly and be followed by a rebound in both confidence and consumption, appears to be a forlorn one.
Financial markets do not always get it right, but the now accelerating reversal of bond yields since mid-January, after six-months of steady rises in anticipation of higher growth and inflation in 2020, points not only to a total loss of that momentum but a deeper and longer lasting economic downturn than in 2008.
Italy’s decision to lock down the equivalent of the combined populations of NSW, Victoria, Tasmania and South Australia is a pointer to why.
It should be ringing alarm bells everywhere, especially in the corporate and investing worlds: no movement means no activity; no activity means no cash flow; for businesses with debt, no cash flow means bankruptcy, as surely as if the bank bill rate hits 18 per cent, as it did on September 11, 1989.
Already companies everywhere are telling staff to work from home for a while, and the panic buying of toilet paper suggests that a lot people think they won’t just be working from home
It’s one thing for dictatorship like China with no human rights to lock down vast parts of the country to prevent the spread of a virus, but it’s another entirely for a western democracy like Italy to do it.
When will Australia have to do that too, instead of simply urging those at risk to “self-isolate”? And at what point will the United States swing from belligerent complacency to over-reaction?
Italy’s industry lobby, Confindustria, has called for a “massive investment plan” from the government to replace the collapse in private activity caused by the quarantine. A spending package of €7.5bn has been floated, but that would surely just be the start of what’s needed. The Italian government has asked the EU to suspend budget rules.
A column in Wall Street Journal over the weekend put the case for a $US350 billion stimulus package in the US, involving cash handouts like those the Australian government did in December 2008.
The problem for the Coalition gin repeating that dose, or the rest of the GFC stimulus, now is not just that they have spent a decade bagging it as irresponsible when it plainly wasn’t. They will need to think of something else, or at least something that looks like something else. But it’s quite unclear what sort of fiscal stimulus would actually work this time.
If the cause of an economic downturn is mass quarantine, or even just large parts of the population being afraid to go out, will giving them cash or a tax cut prevent a recession? How about a spending splurge on school buildings, roof insulation, social housing and community infrastructure – like the $42bn package announced by the Labor Government on February 3, 2009?
It seems like the best economic stimulus the government could do would be to control the epidemic quickly, as China seems to have done.
But the economic and social cost of doing that appears to be enormous: 60 million people were quarantined in Hubei Province, but hundreds of millions were isolated and prevented from travelling across the country. As a result the economy has ground to a halt and businesses are running out of cash.
That’s where the Australian government’s focus should be – on the preservation of small business.
Legislating faster payment terms as recommended by the Small Business Ombudsman, Kate Carnell, would be a good start, but that’s all. More likely some sort of direct cash support for businesses will be needed.