Standard models used by economists to predict economic growth do not factor in the widespread disruption in supply chains, restrictions in travel and the use of quarantining. Not since the oil crisis of the 1970s has the world faced a supply side shock of this nature.
The OECD predicts Australia will be one of the worst-hit economies due to our exposure to China. In response to the economic consequences of the coronavirus, the International Monetary Fund is calling for co-ordinated global action to support growth.
China has already announced billions in additional stimulus measures, with more expected. Malaysia, Taiwan, Italy and Singapore have all rolled out plans to boost their economies. Germany and South Korea have both foreshadowed major stimulus packages in the last week. These governments are going early and going hard.
Our own Reserve Bank was the first central bank to move when on Tuesday it cut interest rates to a new record low of 0.5 per cent, and the US Federal Reserve quickly followed suit with an emergency 0.5 percentage point reduction in rates. These cuts will help address weak consumer and business confidence (although the response of stock markets seems to indicate they have been further spooked by the move), but will not address the inability of businesses to produce goods and services because of missing parts and workers stuck in quarantine.
While the Prime Minister and Treasurer have acknowledged that the coronavirus would have an impact on its plans to return the budget to surplus and on economic growth, they are yet to push the emergency button on an economic stimulus. They are being careful to indicate they will not be joining the economic stimulus happy hour – this will not be a repeat of the global financial crisis.
Instead the Prime Minister has insinuated that only a targeted “boost” for the most directly impacted industries, education and tourism, will be provided. While if this support eventuates (the Treasurer flagged measures to boost business investment last year which never happened) it will help, it will not constitute going early, going hard or going to households.
Neither an interest rate cut nor government spending will fix global supply chains or stop workers from being quarantined, but they can support households and businesses to keep spending on goods and services (other than toilet paper). This will be critical to minimise the impact of the downturn and speed the recovery.
Government spending will become even more critical in the mix of policies to support growth if the shock to supply side of the economy has an impact on inflation. While we have become used to a world of low inflation, where monetary policy could be loose and free, the contraction on the supply side of the economy is likely to change this and change the levers available to support growth.
Australia has first-hand experience of what is needed – it’s time to use it. A combination of support for businesses (an investment allowance), households (an increase in Newstart and special one-off payments, not tax cuts) and local jobs (small shovel ready infrastructure projects and community investment).
Economic management requires the political will to do what is required to support jobs and businesses. Now is not the time for ideological posturing about size of public debt, which has already more than doubled under this government. Like a happy hour, there is only a short window of time for action. Unlike a happy hour, it will be those that do not turn up with a strong economic plan that end up with the biggest hangovers, with deeper and longer economic slow-downs.
Angela Jackson is an economist at Equity Economics and was Deputy Chief of Staff to Australia’s then Finance Minister, the Hon Lindsay Tanner during the global financial crisis.