It looks like political leaders are finally recognising the urgency of responding to coronavirus, with President Trump declaring a national emergency in the US and Australia cancelling mass gatherings. It’s about time. This is a huge public health threat with potentially large economic costs.
Markets have reacted positively to the recent displays of national leadership with both the Australian share market and the US share market rebounding yesterday. The S&P/ASX 200 was up 4.4% yesterday and Wall St was up more than 9%, its largest one-day gain since 2008, as reported in the Financial Times (see chart below).
The Australian market is still 10% down from where it was this time last year and 23% down from the peak in February (see chart below).
Given the analyses of the trajectories on coronavirus infections in other countries I’ve seen, the next two weeks will be critical for Australia (see this excellent Grattan Institute analysis from earlier this week). We will either contain the virus, and its impacts will be limited, or infections will grow exponentially and authorities will need to take radical steps similar to those seen in China, Italy, and New Rochelle, NY to stop it spreading further. That would bring massive economic disruption.
As an economist, I’m unable to forecast the growth of the virus and, hence, its likely economic impact. In my view, neither is any other economist at the moment, so I was very surprised at Chris Richardson’s mild forecast of the economic impact of coronavirus in his opinion piece in the AFR yesterday:
Deloitte doesn’t forecast the Australian economy to have shrunk in the March quarter, and the nation is now in with a fighting chance of avoiding it in the June quarter as well. Even more importantly, the effect on jobs is likely to be muted.
I think it’s far too early to tell whether we can be this confident.
Chris Richardson was happy about the Federal Government’s announced $17.6 billion stimulus package earlier this week, noting it helps employers keep apprentices, an at-risk group, in work. The stimulus package was probably necessary to bolster confidence, but it won’t be that effective if the virus shuts downs large swaths of the Australian economy for several weeks or months. Check out Stephen Long’s ABC News report for some excellent analysis.
Certainly, the Government will be actively considering additional stimulus measures in the 2020-21 Budget, as will our own Queensland Government. I expect the state government will need to present some cyclically-adjusted/structural budget balance estimates in its upcoming state budget to justify the debt blow out that will no doubt occur.
Perfect headline from News Ltd soon after the PM’s COAG address on Friday.