Pearls and Irritations

 It’s now clear that draconian measures imposed in response to the crisis have worked. 

The big news of the past week is that China has effectively contained coronavirus, with new cases there having dropped dramatically. Whatever legitimate criticisms there were of China’s delayed recognition of the virus’ seriousness and its initial lack of transparency, it’s now clear that draconian measures imposed in response to the crisis have worked. It means China’s economy could well be functioning fully by month-end, which is great news for Australia. If right, it will make the federal government’s multi-billion stimulus plans unnecessary and, most likely, counterproductive.

At the time of writing, there have been 95,120 confirmed cases of coronavirus worldwide, 80,000 of which originated in China. Total deaths globally number 3,254 with China having 2,981. The number of confirmed daily cases in China though has decreased significantly, having peaked near 4,000 in early February to 119 now. By February 27, the number of confirmed daily cases was higher outside China than in China itself.

The World Health Organisation (WHO) sent 25 experts to China for nine days to study what can be learned about the virus and released its important report a few days ago. The WHO found that most people infected had mild cases and recovered. Of the cases studied, 80% were mild to moderate, 14% severe and 6% critical. Those most at risk were people aged over 60 and those with underlying health conditions. Cases in kids appear to be relatively rare and mild. Human-to-human transmission has largely been occurring in families. The virus is transmitted via droplets (sneezing and coughing) and fomites (objects like utensils, clothing, furniture) during close, unprotected contact.

Importantly, the WHO says that once China realised the seriousness of coronavirus it acted quickly and that has been successful in containing the virus. It explains why mortality rates outside the hot spot of Hubei province have been low at 0.4% versus the 3.7% rate recorded nationally. The WHO acknowledges that the strict quarantine controls, travel restrictions and other measures which China enacted have worked.

The economic implications of China having contained COVID-19 are significant. China’s economy could be back to normal by month-end. If correct, the economic impact from the virus would be restricted to one quarter (January to March). It would mean business supply chains, jammed from the China outbreak, would start to move freely again. For Australia, the export sector – especially mining, tourism and education – would likely receive a huge boost. Albeit depending on how bad the virus gets in Australia and the willingness of Chinese tourists and students to come here.

Stock and currency markets indicate that this thesis may well be right. The Shanghai Composite Index has been a notable relative outperformer of late. The Aussie and Canadian dollars have bounced. Copper prices have risen since late February. And iron ore prices bottomed in early February, coinciding with the peak of new Chinese coronavirus cases.

Against this backdrop, the Morrison government has flagged a multi-billion stimulus package with tax relief measures as its focus, to be announced next week. Lobby groups are, naturally, calling for things which will benefit themselves – big business wants a business investment allowance and tax breaks. Small business would like wage assistance, tax breaks and direct cash injections.

Meanwhile economists – most of whom seem to always favour monetary and fiscal stimulus no matter what the circumstances – are suggesting up to $4bn in stimulus, equivalent to 0.25% of annual GDP, would be a “good start”. Most appear to want more if things deteriorate further from here.

Now, the question needs to be asked: is fiscal stimulus really needed? If Money, Mobs & Moguls is correct and China’s economy is back to normal soon, it means Chinese economic activity could bounce back strongly at the start of the second quarter (aided possibly by stimulus there). In turn, if Australia manages to keep the virus relatively contained in the meantime, the economic impact from COVID-19 may be subdued come the second quarter.

That may result in stimulus providing a short-term sugar hit, with some potentially negative long-term costs, including:

1. The federal budget deficit will increase substantially. Any such increase will be paid for via increased taxes or increased inflation. We know the government won’t pick higher taxes. Inflation is a tax too, just a hidden one preferred by governments the world over.
2. Stimulus may be allocated to unproductive areas. For instance, it could include direct cash given to households. This is based on the assumption that people will spend the money and consumption is good for the economy. This assumption is one of the biggest misnomers in economics: production, savings and investment drive economic growth not consumption.
3. Providing stimulus means the government would have less firepower if the crisis gets much worse. Given the Reserve Bank has no bullets left as it’s lowered interest rates to near-zero, the government would need to do the heavy-lifting in any deeper, more sustained downturn. But it may be hamstrung too.

All of this is not to downplay the possible multiplier effects of cutting business taxes, for instance. The point is that every action has costs and benefits which need to be carefully weighed. Governments, and their economic advisors, are prone to “do something”, anything in fact, to help a given situation, particularly an economic shock. But often the best thing is to do nothing. On balance, weighing up the different probabilities, a wait-and-see policy would appear to the best strategy at this point in time.

James Gruber is a businessman and writer. He authors a blog on Australian business issues: Money, Mobs & Moguls

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