We are not ‘fighting’ the virus but staging a skilful retreat.
The economic ravages of COVID-19 may prove, in the end, more lasting and more severe on the world than the sickness and death caused by the pandemic. Even nations attempting to mobilise to deal with the trail of death and disruption in China, Italy, Iran, South Korea, and all of the other countries in which the virus has a significant foothold seem to be sleepwalking around strategies for getting the engines running again.
Australia’s economic response has been modelled on what Labor, under Kevin Rudd and Wayne Swan, did with the global economic crisis of 2007-08. Treasury and our other economic institutions had war-gamed what might happen in the world bond market, swollen in particular with dodgy American real estate securities went belly up. The fear was of a sharp contraction to the Australian economy – in effect a seizing up of the engines from a lack of liquidity. The advice from Treasury was to pump money quickly into the economy, focusing on households and promoting investment. The strategy was a great success, even if the then opposition was critical of the volume of spending, and even if it pretended that Australia’s success in surviving the crisis owed rather more to China’s fiscal responses than to our own. The Rudd-Swan strategy was being derided as late at last week. We can all smirk at how closely the coalition government’s belated stimulus matches the one it so attacked.
Both were intended to do a similar sort of job, but it may well prove that the differences between the current crisis and that faced by Rudd are just as significant as the similarities. Both involved a developing paralysis of the world economy, but, though Australia could not completely insulate itself from the GFC, its financial institutions were not as caught in the global fallout as those of most of the rest of the world. Our banks, in particular, had remained sensibly capitalised, and had not gone aggressively into American real estate. The Government took measures to reinforce public confidence in our banks, and its handouts and spending – of about $10 billion – was successful in keeping retail demand up, in and dealing with local areas of unemployment until world economic recovery began. A criticism was that some programs – particularly with the libraries and school halls – took time to swing into action and might have been scaled back when it was clear that the medicine was working. Neither this, nor the roof insulation program, were sinks of profligacy, waste, incompetence, and, in the case of the pink batts, industrial manslaughter, as the opposition charged and, as to a degree, many in the population now believe. But this is rather more a measure of Labor’s strange unwillingness then to defend itself from criticism and a sustained media campaign, or to promote how its rescue strategy had lasting positive results for households and local communities.
This time about, the fresh stress on the economy is from a different sort of international shutdown. It has come from closed borders, from an international collapse in tourism, from closures of shops, public places and entertainments and places of public congregation. In Australia, it has had dramatic effects on our sale of educational services to Chinese students, particularly at universities. But it has also disrupted export sales of minerals and agricultural products. For other nations, quarantine zones, imposed from within or without, have virtually stopped industry and commerce. China, where the Coronavirus seems to have originated, has taken ages to gear up again, and manufacturing activity may still be at only 50 per cent of where it was five months ago. Because our economy has been so closely aligned with Chinese growth, we are already experiencing the slow down. But it may get worse before it gets better. South Korea, Japan, Iran and Italy are already seriously affected, but a further drop in world growth and trade is inevitable as COVID-19 spreads out in the European and American populations.
The federal stimulus money is well directed towards holding up domestic growth. On this, moreover, it is joined with money going into recovery (but not reconstruction) after the disastrous bushfires, and even some of the aftermath of drought, now largely broken. The disadvantage and disruption among our trading partners may even give entrepreneurs new opportunities in the marketplace.
But Australia’s wealth and growth are very much tied into world economic activity. It is pretty much beyond Australia’s own capacity to get the international engines humming again, let alone at the rates that have sustained our growth. China may be back in the marketplace sooner than some people expect, but its demand for Australian iron ore and coal may be at considerably lower levels until demand for Chinese goods increases in Europe and America. In most of those nations, the threat from COVID-19 is certain, but still rather more potential than being realised. As is the situation here in Australia.
Most people expect that the pandemic will have done its worst by the end of 2021. It will probably still be present in most countries, but rather more as a smouldering log than as an active fire. Before that, however, it will have caused enormous social and economic disruption. Restoring economic activity and trade after a credit crisis might be quicker and easier than after the damage caused by disease. Australia may be able to keep its own pulse running, but find itself having little power to effect recovery, even among key trading partners.
If that is the case, Australians should prepare themselves for explanations of their difficulties coming from Scott Morrison, Josh Frydenberg and Mathias Cormann, sounding suspiciously like the “excuses” they derided from Wayne Swan, Julia Gillard and Kevin Rudd. Labor could almost borrow its jeering script from the lines prepared for Joe Hockey and Tony Abbott by Peta Credlin. Spending blowout? Letting the one-off stimulus migrate into structural deficits? An ever prospective, never achieved Budget surplus? . A collapse in revenue? A further blowout in national debt? All, of course, unexpected and unable to be planned for? But if Labor was to be accorded no excuses with a similarly unexpected GFC, why should the coalition – who ever claim themselves to be the better economic managers – get any leeway?
Jack Waterford is a former Editor of The Canberra Times