JAMES GRUBER. China has effectively contained corona virus.

 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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6 Responses to JAMES GRUBER. China has effectively contained corona virus.

  1. Jerry Roberts says:

    The managing director of the International Monetary Fund, Kristalina Georgieva, described the present dilemma as an unusual mix of supply and demand problems. I thought it was a good description. Certainly we will need fiscal stimulus.

  2. Jocelyn Pixley says:

    “This assumption is one of the biggest misnomers in economics: production, savings and investment drive economic growth not consumption.”
    A FURTHER OBJECTION: Joseph Schumpeter made great fun of Adam Smith for wrongly thinking savings automatically prompts investment. Bernanke made the same error, with QE, to which his colleague Alan Blinder gently said, “what is saved is not spent”. In fact investment is flat – apart from the other careful objections (herein) to this neoclassical “opinion”. In any case, if, as the writer says, China is recovering (a good thing for people’s health!), then the so-called “supply-problem” of Chinese goods and services exports will soon end. We still have a massive demand problem here, and worse if casual workers get no pay if in quarantine.

  3. Geoff Davies says:

    Totally endorse the comments of McRae and Crout. James Gruber’s constricted view of the economy has got us into the current anaemic mess. As Crout says, it’s not sovereign money that ought to limit us, it’s resources.

    It seems naive to think China will be up and running in a month. The virus is still there. They will need to ease back into business slowly so as not to just set it running again. Could take a long time.

  4. Malcolm Crout says:

    “This assumption is one of the biggest misnomers in economics: production, savings and investment drive economic growth not consumption.”

    I’m sorry but this is incorrect. GDP is the measure of economic growth and personal consumption is 70% of GDP. https://www.google.com/search?client=firefox-b-d&q=consumtion+proportion+of+gdp

    Stating that deficits drive inflation is a lazy explanation of what causes inflation. Refer http://bilbo.economicoutlook.net/blog/?p=13834
    Australia has had substantially more deficits than surpluses over the decades and tracking inflation over that period does not reflect the simple claim that deficits cause inflation. https://www.focus-economics.com/country-indicator/australia/inflation

    “Providing stimulus means the government would have less firepower” is neoliberal dogma. Sovereign Governments who issue their own currency and float their exchange will never run out of “firepower” . The only limit to the capacity of the Australian Government to prime the economy would be a lack of resources and there are plenty of idle resources available.

  5. Andrew McRae says:

    From the moment James Gruber cast doubt on the need for fiscal stimulus, I bet he’d end up with the supply-side position. At least he didn’t mention the Laffer Curve or the tickle down theory. He says fiscal stimulus ‘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.’ It’s James who’s pushing one of the biggest and oldest ‘misnomers’ in economics.

    It’s certainly not an assumption to argue that if the lower income receivers and those on various forms of social security receive direct fiscal assistance they will spend it; when people are trying to live on less than subsistence payments like Newstart it strongly suggests they will consume more goods and services if their income rises. It’s tax cuts to upper income people that will not be spent; rather, they’ll simply go into inflating asset values . That’s why most economists are calling for an immediate increase in (the Orwellian) Newstart in order to stimulate demand. Economic growth was higher in the USA after Clinton’s 1993 tax increases on the wealthy than it was when Reagan cut those same tax rates. Where is the strong historical evidence that supply-side works to stimulate an economy for the welfare of all?

    When there’s a deficiency in demand the government needs to take up the slack. Coronavirus aside, there’s been plenty of slack in the economy for much longer than the virus has been around. Even the very small growth in GDP has been based largely on government expenditure in the health and education areas; without that the economy would have been in recession many months ago. The arguments for fiscal stimulus have been propounded by the Reserve Bank and many economists for at least a year, and rightly so. It would be stupid to pull back from that position merely because it appears (perhaps optimistically) that the Chinese economy might just be back to ‘normal’ in a few months.

  6. Anthony Pun says:

    Reading through this this article and those in the Australian mainstream media about the same subject, I find it strange that there is little or no mention of how to maintain good economic relations with our No 1 trading partner. All the minor issues are paraded but they don’t bring home the bacon. Coronavirus has shown us how fast the adverse effect of economic decoupling can do any economy, even in developed countries. Australian and Chinese economy are coupled and interdependent; and interdependence is the key to a healthy economic recovery. China bashing means you can’t have the cake and eat it! Or is LNP too embarrassed to make up with China or seen to kow tow to her!

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