As recently as two weeks ago, they still clung to the hope that they might be able to salvage something like a surplus. Even after the bushfires, even with a new coronavirus on the loose.
There is an old adage: “The time to fix the roof is when the sun is shining.” Australia has enjoyed more than a decade of sunshine since the global financial crisis. And a world-record 28 years of sunshine since the last recession. Yet now that the savage storms finally have arrived, the roof is still not fully patched. This is an indictment of both the Labor and Liberal parties.
The good news, however, is threefold. First, Australia came close to fixing the hole in the roof. Second, it’s offering more shelter than is available in almost every other country. Australia and Germany are the two developed nations with balance sheets that can best afford a stimulus package now, as the OECD has pointed out.
And third is that Morrison and Frydenberg have shown the judgment and realism to abandon their impossible dream. And not a moment too soon.
It would have been better had they got ahead of this crisis and announced a stimulus package two or three weeks ago, while confidence was still holding up. Before panic-selling of shares and panic-buying of toilet paper.
But credit where it’s due. The Morrison government this week announced a fiscal stimulus package equal to 1 per cent of GDP. As it did so, the conservatives in the government of Germany’s Angela Merkel were still arguing about whether stimulus spending was necessary.
At the same time, the US political system was still caught up in political arguments about what to put into its stimulus package.
So Morrison made an address to the nation that spelt out his economic measures, but Donald Trump delivered his address to the nation around the same time and could only talk in vague terms about a possible future plan.
Australia’s fiscal plan needed to be credible, sizeable and unpanicked. It managed to be all three. That will help soften the brutal economic downturn to come. China, the US and the European Union are all in, or entering, recession.
The question is whether Australia is ready for the next phases of this crisis, the ones already unfolding around us. Bear in mind that Australia’s Chief Medical Officer, Brendan Murphy, has said that COVID-19 is a “very mild condition” for people other than those in vulnerable groups of the sick and elderly.
And the former chief medical officer for the Canadian province of Ontario, Richard Schabas, observes that more than 4000 people worldwide have died of the virus in the three months or so since it first burst upon our attention. “But in the same three months,” says Schabas, “there have been about three million deaths in China from other causes, and about 14 million deaths worldwide. During the same three-month period, according to Health Canada, there have been almost 10,000 deaths in Canada from tobacco addiction, for instance – and just one from COVID-19. Is COVID-19 a global crisis? Certainly for people who can’t add.”
Far more dangerous than the “very mild condition” is the panic. The early panic of the past week or two was bad enough. Donald Trump’s address to the nation, intended to calm his country, had the opposite effect. When he declared an arbitrary ban on all travellers from Europe, and a ban on “the tremendous amount of trade and cargo” from Europe to the US, investors saw this as promising a major aggravation of the economic damage to date.
At the time Trump spoke the words “this is not a financial crisis”, he might have been correct. By the time he finished speaking, he was not. The Dow Jones futures market was flashing red to the tune of a further 1000-point-plus fall. It didn’t help that the European Central Bank chief Christine Lagarde bungled a press conference of her own, further spooking markets. Wall Street ended its worst one-day rout since 1987.
Were there no grown-ups left, investors wondered? By Friday, Australian time, global stockmarkets collectively had lost fully a quarter of their value at their recent peak, according to the FTSE All-World Index. All over a “very mild condition”.
So what are the next phases of this crisis? The story so far, for a quick recap: Australia’s phase one was the beginning of the health response – banning travel from China and moving to contain the virus. Second was the decision to move from containment to management, slowing transmission to match the capacity of the health system to provide ventilators to severe cases.
Third was the beginning of an economic response with a monetary decision – the Reserve Bank cut official interest rates last week. Fourth brings us up to date with this week’s fiscal plan, to support growth in the economy.
Four more stages are now in prospect. One appeared in the financial system at the end of this week when liquidity faltered in bond markets, in the US but also in Australia, producing some wild price swings. The experts at Cross Border Capital posed the question: “Is this GFC Number 2?”
The last GFC happened when global liquidity dried up, shutting down businesses in the real economy that couldn’t get finance. This time, as Cross Border Capital posits, it’s running the other way – a breakdown in trade in the real economy is “causing a massive demand for precautionary liquidity”.
So the answer is no, it’s not yet GFC Mark II. But it could be, depending on how deep and long the panic runs.
Another is in the health system. Senior Australian health officials expect that community transmission, so far negligible, is about to pick up in the next 10 days or so, with a rapid increase in the number of people infected. The authorities are anticipating this – that’s why the federal government is paying for 100 “pop-up” fever clinics to open.
And it’s the reason that governments state and federal on Friday advised a ban on non-essential public gatherings of 500 people or more. And the reason they have announced a new decision-making body combining state and federal leaders, a “national cabinet”.
Yet while it’s anticipated, and while, once again, it remains a “very mild condition” for the vast majority, the capacity for panic cannot be overestimated. The reputation of Australia for good-natured calm in the face of danger is in tatters already, long trails of toilet paper flapping in the breeze.
The third possible new phase is the deepening of the economic damage. The more markets panic, the more governments impose arbitrary shutdowns, the worse the economic dislocation. The Morrison government – wisely – has kept open the option of a second wave of stimulus measures.
When the Prime Minister says the government response is “scaleable”, he means it can be increased. In Friday’s meeting of state, territory and federal leaders under the rubric COAG, the states discussed their own ideas for stimulus spending. This, too, is sensible planning.
The fourth possible new phase is geopolitical. That is, for the virus to be used by China and the US to aggravate their existing strategic competition. Morrison’s address to the nation tactfully described the virus as coming from elsewhere.
But in the first sentence of Trump’s address to the nation, he spoke of the outbreak “that started in China and is now spreading throughout the world”. At the same time, China’s official Foreign Affairs spokesperson threw out the accusation that the virus might have been carried to China by the US Army. And as China now donates millions of masks and other gear to countries around the world, it is portraying itself as the saviour of the world with the US as the problem. The virus is being weaponised for political warfare.
For a bug that carries for most people only a “very mild condition”, humanity is managing to turn it into a very wild one.
Morrison and his ministers have managed the transition from one reality to the next, but reality is accelerating.
Peter Hartcher is political editor and international editor of The Sydney Morning Herald.