Warren Hogan, TEC Economic Advisor – 5 March 2020.
Everything has changed in the last two weeks. Last week marked a new phase in the global health crisis related to Coronavirus ( COVID-19) with the new case count outside China accelerating sharply. China’s containment strategy has bought global health authorities time to prepare for a rise in cases but has failed to keep the outbreak confined to North East Asia.
The World Health Organisation (WHO) has raised the emergency level to ‘very high’ and warned that the virus will reach most parts of the world. The global health strategy has shifted from containment to pandemic preparation.
No one knows if this will become a pandemic with the WHO only willing to say that there is ‘pandemic potential’.
Shutting down the global transportation system is not feasible as it will all but ensure a global economic recession and widespread financial distress. Government’s must now manage the health and economic implications of the spread of the virus.
Critical to this process is managing panic. If consumers around the world substantially reduce their spending either as a precautionary measure or in response to public health fears the impact on businesses could be substantial.
The key economic challenge is to stop a vicious cycle of weaker spending and job losses taking hold. Targeted fiscal policy can help industries at risk although many businesses may use this as an excuse to re-set their cost base and operating model in an otherwise challenging economic environment.
Global equity markets have fallen more than 10% in a week as this new phase has begun to unfold. Central bank rate cuts, lead by the US Fed with a 50bp cut, do not appear to have arrested financial market weakness.
Large falls in global share markets have added to the uncertainty and fear in the broader community that this virus is going to have large social and economic impacts.
The US 10 year government bond yield, the key benchmark long-term interest rate fell below 1% for the first time ever.
We should expect countries that have the capacity to ease monetary policy will take out some insurance by cutting interest rates. Global interest rates are rapidly converging on zero.
Monetary easing will be aimed at shoring up confidence in the economy and financial markets as much as anything. Global monetary policy is already stimulatory. Small rate reductions will be unlikely to have a meaningful impact on underlying economic activity.
This leaves a clear role for the political leadership to provide targeted fiscal policy measures to help keep business afloat and people in jobs.
The trade and travel restrictions that have been in place in and around China for more than a month will have major ramifications for Chinese economic growth as well as activity elsewhere. Estimates of the impact of these containment policies on Chinese economic growth in the first quarter of 2020 range from -2% to -10%.
The weekend release of the latest Chinese PMI data show precipitous falls to levels never seen before. Few countries are as exposed to Chinese demand as Australia.
For Australia’s economy, there have been disruptions to trade and travel as well as supply chains that will hurt business and consumer activity as well as export receipts over the first quarter of 2020.
It is too early to know the magnitude of these impacts as we have very few official statistics available for 2020 at this stage. Coming on the back of the summer bushfires there is a strong prospect that Australia’s economy will have recorded very little growth over the course of the summer.
We have just received the 2019 Q4 GDP numbers which highlights modest growth of 0.6% for a 2.2% annual rate. This is a little better than expectations but was mainly the result of strong exports and government spending. With some much happening since the start of the year, the latest GDP numbers will be quickly cast to the dustbin of history.
The impact of the bushfires and the initial coronavirus effects will show up in the Q1 data. Many analysts have now pencilled in a negative number. This is no done deal as the offset to these drags on growth has been household sector stockpiling of key essentials in late February and early March.
Spending at chemists and supermarkets has accelerated sharply as people have stocked up on medical supplies, non-perishable foods and yes, toilet paper.
A negative GDP result for the first quarter of 2020 leaves Australia exposed to a technical recession. A technical recession is measured as two consecutive quarters of negative economic growth.
The possibility of a technical recession, the first in Australia for 29 years will be determined by how the economy reacts to the emergence of Coronavirus domestically.
The initial reaction can paradoxically be supportive of measured economic growth as people stockpile essential supplies. The next phase is a reduction in spending as people avoid leaving their homes. As we are seeing in China and more recently in Korea and Italy, shopping districts become ghost towns.
This is akin to a nationwide rise in the saving rate which drains consumer spending and business activity for a short period. Beyond efforts to maintain perspective and keep calm, there is little that can be done to prevent people from willing choosing to remain at home.
It is this phase where government policy actions are so important. A mild technical recession caused by an external shock is undesirable but not a disaster for the community if the employment ramifications can be minimised.
Government policy efforts need to be directed a stopping a negative shock to the economy evolving into a self-reinforcing process of declining demand and lower employment. Monetary policy is of very little use in the short-term. Government’s need to be highly targeted in supporting the parts of the economy that are under stress to avoid job losses.
Ultimately this means supporting impacted businesses which comes with a whole new set of challenges; not least identifying the business that are at genuine risk of insolvency. For businesses that are impacted financially by the Coronavirus it is important to be find out what support is available from the government and financial institutions.
The Federal government is expected to release an economic statement any day now which will provide impacted businesses with financial support.
Listen to the TEC Live Podcast on Economic Outlook 2020 for SMEs
Chief Economic Advisor, Warren Hogan led a TEC Economic Outlook 2020 Breakfast in the first week of February. Warren provided analysis and commentary on the current economic outlook and the global and local factors in play for business in the year ahead. Adam Creighton, Economics Editor, The Australian also features in a response which gives the listener another perspective to consider.
A must listen podcast for insights to help business leaders navigate the current uncertain economic conditions and to support strategic decision making.