How coronavirus will wallop Australia’s economy – and what the government must do

The Guardian has a number of short pieces from economists on the likely economic effects of the coronavirus, and what should be done about it. Here’s mine

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.

74 thoughts on “How coronavirus will wallop Australia’s economy – and what the government must do

  1. How long can the sharemarket keep falling?
    How long can people keep buying toilet paper before they start to feel stupid?

    These questions have basically the same answer.

  2. Ronald, the toilet paper question is interesting. I did the “responsible citizen” thing and didn’t panic buy toilet paper. The consequence of that is that I ran out a week ago, despite making the 100 km round trip to my nearest major urban centre twice to find the dreaded stuff and having no luck despite visiting many shops.

    The moral of the story seems to me to be to recognise that panic buying is irrational but join in early lest you get caught short with your pants about your ankles.

    Having now learned my lesson, 200 cans of baked beans and a bigger water pistol are now on the shopping list.

  3. Hugo,

    The point is to buy well before the panic. I began buying extra food and groceries in small extra lots from mid-January onward, twice-weekly. It was clear even then that the Wuhan epidemic was quite likely to go pandemic world wide. I predicted it as a possibility at that time but not on this blog IIRC. I put it at 50-50 then. My son put it at 99.9% probability even then. He’s been proven correct.

    Buying early gives the supply chain time to cope and adjust. It also cuts buying when the supply chain is stretched and under-manned during the actual crisis. I now will be buying 50% to 0% of my regular grocery purchases for the next 3 months, at a guess. The exact proportion depends on the acceleration and severity of the crisis.

    As for toilet paper and hand sanitizer, I did not foresee that panic I admit. We tend to buy toilet paper in bulk anyway and happened to have enough already stored away. Hand sanitizer is no big deal. We have one tiny bottle for emergencies. Soap is fine to remove the virus from hands and kill it.
    Medicines are no big deal. We don’t take any being lucky not to have preexisting health conditions.

    Most basically healthy people seem to think they need a lot more stuff than they do. They need to toughen up and learn to live frugally. But I have been self-indulgent too. That’s why I carry 10 more kilograms of fat than I need on my frame. That can now come in handy too. I can live off body fat for a considerable portion of my calories if need be.

  4. Unfortunately I expect that in the excitement of shifting priorities we will see the limited climate actions supported (tolerated) by Morrison’s government reduced or abandoned. And I think it will be quite deliberate, in keeping with a pro fossil fuels government that rejects (whilst avoiding actually saying so) the science on climate and believes their own “culture war” rhetoric, for whom strong actions and a shift away from fossil fuels is a green-left evil to be fought to the bitter end, and, in Sun Tsu style, with deception.

  5. KT2 says 10:37 am – Svante says at 3:37 pm “Such Dutton note unnecessary.”. Really?
    “Over 30,000 Chinese students have arrived in Australia since travel ban started
    https://www.smh.com.au/politics/federal/over-30-000-chinese-students-have-arrived-in-australia-since-travel-ban-started-20200312-p549fm.html
    Better Better fix: their cash, immigration loyalty, belonging, housing, financial, and employment status will be taken and they will be [de]retained and allowed to depart after satisfying contracts”

    30k from China via backdoors is part of disaster capitalist modus operandi… ie., in this instance to rapidly spread the initiation of an infectious disease disaster like so much else has been here so far. Economic shock doctrinaire policy dictates to come further down the track… belt tightening the least of it.

    If any of the 30k Chinese students have been able to recommence work in the usual black labour markets many soon will be out of work as will their large number of “spouses” brought here for the work.

    As many lack ready cash and many are additionally in deep debt back home and their immigration(?) loyalty is owned by a CCP department, their sense of belonging also elsewhere, and they’re here for the financial and employment opportunities that are about to dry up long before they attain the pr objective, then other than the relatively few involved in high end real estate money laundering many will also soon lack the means of support here and shall simply choose to depart.

  6. Never mind how corona-virus will wallop the Australian economy. Let’s look at how it will likely wallop the world economy. A crash and a prolonged economic depression seem most likely at this point; a depression which could last at least 5 years.

    China is closed for business currently but seems to have halted the growth of its epidemic IF its figures can be trusted. But as soon as China restarts industry and economic activity in any serious way, a resurgence of the virus seems quite likely.

    Europe is revealing its true status as a basket case in every sense; economically, socially and medically. The epidemic is completely out of control on the Continent and the Europeans clearly have no idea how to contain it. China’s efforts look positively brilliant compared to Europe’s dismal effort if, as must be said again, China’s figures can be trusted.

    After the initial bad outbreak, South Korea seems to be coping reasonably well. They seem to have brought the epidemic there under some sort of control and to have done so without the more extreme or draconian measures. Given their high rate of testing, their figures might be the most trustworthy of all. Japan is also doing well but we cannot be sure exactly why yet. They bungled the “Diamond Princess” episode medically and administratively but deftly made it a problem for other nations and not for themselves. if that was the goal they were successful. Japan might have their epidemic under control but it is too early to say and there may be doubt about the extent of their testing regime.

    The USA is another Europe waiting to happen. The epidemic in the USA will be an equal or greater disaster than that in Europe. Their testing and medical response is completely inadequate and not the response of a first world nation at all. Australia? Well we care about us but nobody else does. We are completely unimportant in global economic terms (even though we punch above our weight in generating climate change which of course is something to be ashamed of). For the record, we might do as well as South Korea in stemming the virus but I doubt it. We are more likely to look like France or Germany who only look good compared to the complete messes in Italy and Spain.

    This is likely a watershed moment in world history. The relative performances of the West and the East indicate that the West will come out this event much weakened. The developed and relatively developed East (China, Sth Korea, Japan, will be weakened less, maybe much less. They will take over clear economic leadership of the world. Continental Europe will collapse to a much lower economic base relatively. The USA will collapse too but not as badly as Europe.

    The winner is China (and the East). They can, as it were, unleash a virus against their own population (by accident and incompetence) and find, as it spreads globally, that that which damages the opponent worse than oneself is effectively a weapon of positive differential effect in geostrategic terms. This pandemic speeds the transition to a China-centric world. At the point where Wuhan was heavily involved in the epidemic, it was in China’s interest to see the virus spread to the world. They didn’t have to do anything. Just let the West make the mistakes of keeping travel far too open for far too long and watch the West’s incompetence in dealing with this crisis.

    The incompetence of the West to meet this crisis is heavily wrapped with neoliberalism. The neoliberal system has led us to this point of governmental incompetence and unpreparedness. We watch our neoliberal and corporate elites confront this crisis and we can see that they have absolutely no idea what to do. They cannot act in the necessary medical and public health ways because those systems were wound down, white-anted and allowed to degrade (tin-plated instead of gold-plated) so that they would crumple at the first application of real stress in crisis. As we failed to build the right systems, so do we risk collapse.

    There are still a few chances to recover from this mess but that will not happen unless we radically change our entire political economy system, who it rewards and what it builds. That’s a topic for another post.

  7. Questions about the only paragraph which bithered me in linked Gardian article.

    “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  from linked Guardian article.

    How and when was the government’s mistake?

    When has the rba board neglected it’s ‘singular responsibility’? 

    I assumed the rba was independent, so how could the government “squib the opportunity to rein in that licence and hold the RBA more accountable.”?

  8. Ikonoclast: I don’t know about Europe, its a lot of different countries and international associations. But Austria cut off train traffic from Italy on 23 February, shut down lectures at universities and recommended people work from home on 9 March, and is shutting down all schools and nonessential businesses on 16 March. A Schengen Region travel ban to China-South Korea-Japan in early February might have helped, but then the Patient 0 would probably have been an asymptomatic traveller from the USA or UK. We survived the Nazis and being bombed flat by the Brits and the Yanks! And the population of Hubei is about the same as the population of Italy.

    Austria is patently richer than the rich Anglo country I come from.

  9. Ikon, I am not an epidemiologist, and I’ve been reluctant to get into this, but I have studied epidemiology (and have to say was very good at it). So please take what I say in that light.

    You cannot draw the kind of conclusions that you are drawing from the evidence available. There are so many unknown factors. In particular, the rate of testing and the diagnostic ability of the country are amongst them. For example, do you think Indonesia necessarily has a lower rate and fewer deaths than other countries, or do you think possibly people are not being tested and illness/cause of death not being diagnosed? Similarly, the USA appears to have low incidence, but everyone knows their testing has been inadequate. An interesting number of Australians being diagnosed have recently come back from the USA. On the information I have though I can only say it’s ‘interesting’ because you’d need to know a whole lot of other things, eg how many Australians travel to/from America, and how does that compare with numbers travelling to and from other countries. Hopefully people are working on collecting and analysing all the necessary data, but people like us just don’t know at present.

    You certainly cannot say the whole of Europe is a basket case. In fact I’ve just been looking at some of the published data for European countries and in some the death rate/incidence rate looks very low. But again does that just mean they’re testing more people, including those who are asymptomatic? Or does it mean it’s earlier in disease progression? We just don’t know a lot of things and we need to refrain from making extreme statements. I know this is just among friends, so to speak, but if this sort of thing is being said in the community it can support ‘alternative facts’ like Trump’s politicised position that the US is doing very well and Europe is the problem.

  10. Btw when I say death rate/incidence rate, I mean as a formula. I don’t mean both are necessarily low, but rather the number of deaths looks quite low as a proportion of the number of identified cases (in some cases below 1%).

  11. A proposed definition of economic depression given on Wiki is a recession lasting 2 or more years. I think two years of negative growth for most of the world is more probable than not at this stage.

    I’m usually optimistic but on this occasion I’m joining Ikonoclast:

  12. Val,

    The framing of “extreme comments” is interesting. Only very poor prognostications seem to get the appellation “extreme”. Trump’s absurdly positive statements, many with no basis in fact, might get termed “overly-optimistic” or “Pollyana-ish” but not usually “extreme”. Yet, an overly optimistic assessment which leads to a progress (or regress) into extreme danger is indeed “extreme” and merits the term. Extreme optimism can indeed be very dangerous.

    The West (and not just the West) has demonstrated extreme optimism and over-confidence in human capacities, unfettered capitalism and uncontrolled technology. This has lead us to disaster. The extreme optimism and hubris of neoliberalism, growthism and techno-optimism have exposed us to the now unavoidable rigors and outright mortal and existential dangers of climate catastrophe, economic collapse and rolling pandemic crises.

    It’s true I did not mention Indonesia. I did mention doubts about testing regimes (or reporting) in both China and the USA to name two, so I am aware of the issue. I think there is likely a great deal of under-counting in countries like Iran, where the epidemic still looks bad even with likely under-counting, and Indonesia where the epidemic count looks small but is likely based on even worse under-counting. This pandemic expands exponentially. We can safely say of countries with small counts today, if we take the counts to be broadly indicative, that they are simply at the start of the curve. The pandemic seeded sequentially around the world.

    What this pandemic shows is that the world is too connected and there is far too much travel going on. I mean frivolous travel and ALL tourism for example is frivolous: enjoyable but certainly frivolous and unnecessary. I have been guilty too as I have traveled. The global economy is so geared to tourism and international trade (as necessary demand mechanisms) that it proved impossible to the captains of government, finance and industry to shut down these processes early enough. Australia should banned almost all travel in and out of Australia from the middle of January or January 31st at the very latest. It was already obvious then that a global pandemic was likely with business as usual. Instead our powers that be preferred to keep travel going. Nothing could interfere with the sacrosanct making of tourism dollars. Well now that decision, that BAU is sacrosanct, has lead to an even worse disruption of BAU. Poetic justice for hubris and gross stupidity I guess.

    Going forward, the world economy needs to be re-geared to expenditures on a renewable and sustainable economy and into expenditures on environment, heath and social welfare. A whole swathe of negative “industries” (really environmentally destructive mass consumption systems) needs to be dismantled. Sport, tourism, international travel, cars, boats, car racing, alcohol, gambling and others need to be dismantled lock, stock and barrel. All the freed resources need to be put to converting to a sustainable steady state economy. If we don’t do this we go extinct. The clarion call of this pandemic is clear.

  13. Ikonoclast says: March 14, 2020 at 5:00 pm
    “This is likely a watershed moment in world history. The relative performances of the West and the East indicate that the West will come out this event much weakened.”

    On relative performance (neat graphics):

    https://www.knightfrank.com.au/blog/2020/03/03/australias-ultrawealthy-population-projected-to-rise-by-29

    …Australian UHNWIs cite the top three issues challenging wealth creation in 2020 as being the flow on from the global economic slowdown, negative interest rates or bond returns and the global trade wars.

    “As a result, 92% of Australian ultra-wealthy population are making changes to protect their wealth.”

    According to Ms Ciesielski, “The number of ultra-wealthy people around the world is predicted to grow by 27 per cent over the next five years, with the population rising by 136,087 to just under 650,000. An additional 31,000 UNHWI were created in 2019, an increase of 6.1%.

    “Out of the top 20 fastest growing countries presented in the report, six are located in Asia, with India forecast to have the highest growth of 73%.

    “We expect Asia will be the world’s second largest wealth hub by 2024, with a forecast five-year growth of 44%, but it will still be only half the size of North America’s ultra-wealthy population, which is forecast to increase by 22%.”

    https://www.knightfrank.com/wealthreport

    On a watershed moment in world history: Mere oligarchy be damned – a new faster track back to true feudalism with faster reversal of the black plague benefits to wage labour.

  14. Our mental health workforce, as well as medical, are going to be stretched.

    Links in article.

    “Behavioural scientists form new front in battle against coronavirus

    “Experts look at role of psychology in public responses to idea of quarantine

    “The body of research included a rapid review published in the Lancet last month on the psychological impact of quarantine, which found that self-isolation can lead to post-traumatic stress, anxiety, depression and public anger.

    “Indefinite quarantines with no well-defined end point – such as those imposed in Wuhan – risk having the most negative side-effects, the paper suggested, recommending that quarantines be restricted to the shortest time period possible and that the public be given a clear rationale for such measures.

    “Other influential research includes a paper by the Economic and Social Research Institute in Dublin on how to harness behavioural science to fight the coronavirus. It found that extending isolation periods beyond initial suggestions risked demoralising people and increasing noncompliance. “Thus clarity and certainty about timelines are both important,” the paper concluded.”

    https://www.theguardian.com/world/2020/mar/13/behavioural-scientists-form-new-front-in-battle-against-coronavirus

    https://www.snopes.com/fact-check/zinc-lozenges-coronavirus/

  15. When to buy the crash? Gerry Harvey recently got bitten badly “catching a falling knife”. Those below have been well ahead of the curve on the covid19 epidemic and financial implications. Mind you, past performance as a guide etc…

    https://nucleuswealth.com/articles/updated-coronavirus-statistics-cases-deaths-mortality-rate/
    Updated COVID-19 statistics and analysis
    Posted on March 15, 2020 b
    Data Notes:
    •We focus on where the COVID-19 disease was caught rather than where the patient is diagnosed. This data has been taken from a range of public sources and estimated by Nucleus Wealth if not available.
    •Often the final data point will only include countries which have reported that day and so will change throughout the day. …

  16. I had to laugh blackly at John Hopkins estimate that USA figures could be highly trusted and that the USA had a high capability to deal with the virus. That is a total joke. The USA has hardly any testing kits available yet although it should perhaps have a lot soon as they are rushed through. I’m waiting for the next scandal in this space like “US testing kits – Many faulty”. That would not surprise me at all.

    The USA also has a very poor ability to deal with this crisis. This not because the country is poor overall (it isn’t) but because inequality, poverty and homelessness are so high and its medical and disease control systems are so degraded by many years of deep cuts and neglect.

  17. Moz in Y. Prof James McCaw on the drum last week noted also:

    85% of IV bags made in Puerrto Rico

    150 of intensive care drugs off patent – generic – made outside US. The genius will say “MAGA”.

    Paul W – depressing yetnapt choice. E B & the Animals – great. A bit before my time.

  18. Follow up about medical shortages. Australia?

    Moving Our Pharmaceutical Factories Overseas Was A Huge Mistake

    The coronavirus outbreak is a good time to ask why our leaders sat by as so much of the US pharmaceutical industry was shipped abroad.

    As the coronavirus sweeps across the globe, that experience is a preview of what’s to come: another round of what one trade publicationcalled the “pharmaceutical version of The Hunger Games.”

    https://www.buzzfeednews.com/article/oliviawebb/coronavirus-why-cant-america-make-its-own-medicine

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