Off the cliff
The number one government policy priority everywhere is trying to prevent health systems from being overwhelmed by the rising number of covid-19 cases. The battle is on to try and reduce the peak of covid-19 infections well below what it could potentially be.
Varying degrees of quarantining and social distancing trying to reduce and contain the infection rate is the only tool available to lower the peak until thevaccination and cure for covid-19 become widely available. The timeline on an effective vaccination/cure is probably not for at least another six months.
In the meantime, while the covid-19 infection rate continues to rise, governments have to keep finding ways to keep those that they believe do not have the virus (a difficult assessment in itself given the limited numbers of testing kits available) away from those tested and shown positive. Inevitably, there is a process of escalation in the restrictions placed on businesses and personal activities to enhance effective quarantining, with each new restriction placing additional downward pressure on economic activity.
The lock-down of Australia international border now extends to the lock-down of some state and territory borders plus the latest shut-down of social gathering businesses such as licensed clubs and pubs. Social-distancing requirements will push the Australian economy into a sharp recession. How deep the downturn in activity is impossible to assess at this point as it depends mostly on how long it takes to contain the covid-19 virus and at what point is it deemed safe to start relaxing the various quarantining restrictions.
In effect, the economy is diving off a cliff although there is some cushioning for the extent of the fall from the coordinated and substantial stimulus measures being provided by both Federal, state governments as well as the RBA. The measures have also appeared to be well-tailored to help smooth the way for eventual recovery.
The RBA has ensured through its inter-meeting policy announcements in March (basic liquidity support measures plus cutting the cash rate to 0.25%; announcing bond purchases to place a 0.25% yield ceiling on the 3 year government bond and 3-year fixed rate loans to ADI’s at 0.25% to fund up to 3% of current loans and a greater proportion of new loans to small and medium-sized businesses) that banks and other lenders should be able to fund, maintain and even extend credit through the approaching recession.
The banks have also pitched in with promises of loan repayment holidays for some businesses experiencing difficulties because of coronavirus.
The Government stimulus measures (Federal and State) for small and medium-sized businesses range from holidays on Government charges and fees to higher investment allowances and straight grants starting at $20,000. This ensures that businesses forced to downsize or close because of severe quarantining restrictions have some capacity to keep paid staff on their books.
For individuals, the changes announced by Government amount almost to providing a limited social wage through the covid-19 crisis, doubling the Newstart allowance to $1,100 a fortnight, without waiting period and without asset test. Other social welfare recipients will receive $750 on 31st March and another $750 on 13thJuly. The Government has also made it clear that more stimulus will be provided if needed.
The Government has lifted the ceiling on what it can borrow from $A500 billion to $A750 billion and that ceiling can be increased further. The RBA will buy whatever bonds it needs in order to ensure the 3-year bond yield does not go above 0.25%. The RBA has also stated that 0.25% is the ceiling interest rate (cash out to three years) until growth and inflation are consistent with full employment in the economy – probably several years away.
It is also worth keeping in mind that the economic starting point before the current collapse was relatively strong. Back in Q4 2019, real GDP grew 0.6% q-o-q and 2.2% y-o-y. Economic growth had been gathering pace through the year. The latest labour force report for February was still relatively strong, showing a bigger than expected increase in employment of 26,700 with the unemployment rate falling to 5.1% from 5.3% in January. Q4 2019 house prices rose 3.9% q-o-q after increasing 2.4% in Q3. Housing finance commitments rose in January by 3.1% m-o-m after increasing 3.5% in December. Even the housing auction clearance rate in Melbourne and Sydney over the past weekend was still above 70%.
Unfortunately, these measures of economic activity will deteriorate sharply and quite soon. As mentioned earlier, forecasts are not possible of the likely size of the collapse in GDP growth or likely rise in the unemployment rate. Suffice it to stay that the usual destruction of business and household income and bankruptcies that comes with recession will play out differently this time because of the support measures being provided by Federal and State Governments, the RBA and the banks. One certainty is that borrowing interest rates look set to stay exceptionally low for a long time.