Like a bear hunkering down for the sparse winter, Australia’s political class want to wait out the outbreak of COVID-19 in ‘hibernation’ – an apt description for a nation now confined to their homes.
To throw in a different analogy, the Federal Government essentially plans on getting the economy into neutral and effectively letting it motor on while minimising the fallout to its most exposed parts – namely, workers and businesses.
“In an ideal world you’d just freeze the economy where it was at March 1, with unemployment at 5.1% and GDP growth at 2.1%, and flick the switch back on when the virus is behind us, but of course we can’t do that,” economist and former Gillard advisor Stephen Koukoulas told Business Insider Australia.
“So the challenge for the government right now is to get through the virus and not emerge on the other side with unemployment in double digits. We already know GDP growth will be negative but we can still keep it from being minus 10% and try to keep it at maybe minus 2% instead. This ‘hibernation’ phase is really just to minimise the downside risk.”
What does hibernation look like for the Australian economy?
It might be about the best Australia can do given the coronavirus uniquely poses twin crises: a health pandemic wrapped up with an economic shutdown.
It’s why the government has moved to keep Australians in work with its ‘JobKeeper’ wage subsidy to businesses and keep those who do lose their jobs afloat financially with the ‘JobSeeker’ allowance.
Even if there is financial pressure, homeowners can defer their mortgage repayments while tenants can rely on a nationwide six-month moratorium to keep a roof over their heads at the very least.
Importantly, all those measures attempt to ensure Australians by and large don’t need to go outside unnecessarily either, to look for work or to move house for example, and thus help minimise further spread of COVID-19.
Hibernation is an economic treatment, not a cure
But the question remains: can a developed economy like Australia’s simply hibernate until the worst is over? Not entirely, according to Koukoulas.
“The fact is we’re not shopping like we used to, we’re not working like we used to, and some businesses aren’t able to open at all. Discretionary spending like on travel, restaurants, weekend excursions is obviously going to dry up, as will spending on things like petrol with people staying put.”
The government shutdown, while protecting Australia from a health standpoint, will undoubtedly then also hurt its economy.
“We’re going to have a recession, it’s unavoidable,” AMP Capital chief economist Shane Oliver told Business Insider Australia. “The government can provide support to workers and businesses but there’s going to be a cost to shutting down the economy, and that will be a bigger economic contraction than anything we’ve seen in the post-war period.”
“The worst contraction we saw in Australia was in the early 80s when the economy shrunk 3.5%. The one we’ll see this year will be at least 12% and it’ll happen a lot faster.”
At this stage, that’s only the base case with the current shutdown in place.
“It’s already started but it’ll only intensify through the June quarter,” Oliver said. “It’s going to have a huge impact on parts of retail, accommodation, tourism, hospitality, property, and some parts of personal services, which together is about 25% of the economy contracting by about half.”
There’s no real alternative
Despite the huge costs, the government’s prescribed cure is likely the best option the country has.
“President Trump wants to reopen the US economy by Easter but that looks like a forlorn hope. The UK is toying with the idea of herd mentality but there’s a whole bunch of problems with that,” Oliver said, noting the enormous number of deaths likely to be produced by such a strategy.
“South Korea seems like it’s done a good job, quarantining people but a lot of countries haven’t been able to emulate their level of success. But our rate of infection has slowed down in the last few days suggesting there’s some evidence it’s working in Australia and holding out the hope we might be able to reopen the economy in a month or two’s time.”
The federal government has more work to do to secure the economy
More importantly, there is work yet to be done to fill in some gaps in ‘Operation: Economic Winter’, namely further clarification and safeguarding of tenants and mortgagees.
“The no evictions policy is ok, but what happens at the end of six months for tenants and landlords? Say you pay $500 per week. At the end of this period, you’ll have $13,000 of unpaid rent. Is that accumulated rent payable at the end of the six-month period or is it written off forever?
“When the government does announce details sometime soon, I’d like to see it pay the rent of people, or even just the first $300 or $400 a week so there’s some financial relief for tenants and landlords, not all of who are rich and many of whom rely on rent to meet their monthly obligations.”
The Morrison government is expected to clarify its position on Wednesday.
Hibernation should help keep Australians employed and businesses afloat
But while the measures won’t insulate the economy entirely, it will help people keep their heads above water.
“Before the government announced its wage subsidy, we were forecasting unemployment to rise to about 15%. Now I’m a little hopeful we can keep it below 10%,” Oliver said.
“The problem will be getting it back down from say 9.5% when the shutdown ends. Businesses are typically cautious in rehiring coming out of a recession and I expect we’ll see the same happen when this is over.”
Under the government’s plans, businesses will also be protected from eviction if they can no longer pay rent, will be able to defer loan repayments for six months, draw on new lines of unsecured credit and in some cases have merchant fees waived and reimbursed.
“It means that if 100,000 businesses would have gone out of business before, now maybe only 25,000 will. That’s actually probably a reasonable outcome given how horrendous the current circumstances are,” Koukoulas said.
This is, of course, the bottom line of the coronavirus, that despite welcome government support there will be some unavoidable pain, no matter how effective the ‘hibernation’ phase may be.
The $200 billion question now is just how long Australia’s hibernation will last.
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