Think Big: Governments are unleashing fiscal firepower to combat COVID-19 — will it be enough?
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A little over a month ago, the Morrison government was sitting on a balanced budget with plans for a 2019-20 surplus of $5bn.
In the wake of COVID-19, it’s now expected to report a deficit of $90bn, Westpac says. And similar emergency fiscal measures are now being rolled out across the developed world to combat the pandemic.
In terms of recessionary catalysts, the health crisis has been unique in that it’s created an unexpected (and violent) shock to supply.
For policy makers, the challenge can be summarised by the question; how can we keep the wheels turning if the economy is more or less forced to come to a complete stop?
And just as important, for how long? In a report this week, Westpac economists Bill Evans and Andrew Hanlan acknowledged the timeframe was “highly uncertain”.
However, “for now, we anticipate that the shut-downs will essentially cease by the December quarter, with only a gradual relaxation during the September quarter”, they said.
The murky outlook has already led to a complete re-rating of equity valuations. And underpinning stocks are the global credit markets; they are are much bigger, and they’ve already required some unprecedented policy moves to avoid seizing up entirely.
Central banks have had their foot to the floor to ease unprecedented pressure on the financial system, and prevent markets from seizing up entirely.
The US Federal Reserve slashed rates by a whopping 100 basis points on Sunday March 15, and announced a $US700bn ($1.186tn) quantitive easing (bond-buying) facility.
As a measure of the urgency of this crisis, here’s a brief timeline of what happened next:
– US stocks fell by 12 per cent on Monday (March 16);
– Credit spreads between corporate debt and US Treasuries continued to widen — a sign of stress in the bond market;
– By Friday March 20, the Fed had already been through around half of its $US700bn QE provision;
– This week, it scrapped the $US700bn figure and committed to unlimited QE. It also unveiled a new facility to buy corporate debt, a move it stopped short of doing during the 2008 financial crisis.
Those measures in the US were accompanied by historic stimulus efforts by the Reserve Bank of Australia.
But when it comes to keeping the wheels turning, the focus has turned more squarely on what governments can do next.
Gary Cohn, former vice-president of Goldman Sachs and Trump government staffer, is also on board:
My advice to policymakers in Washington? You can’t overreact to this situation. You must make decisions quickly & throw as much $ as you can at the situation. If you make mistake of throwing too much $ in a public health crisis, that's a good problem to have. #CNBCPathForward
— Gary Cohn (@Gary_D_Cohn) March 25, 2020
And increasingly, measures announced by major western governments are now focused on individual consumers and households hit hardest by the crisis.
Last Friday, the UK government announced measures to cover individual wages up to £2,500 ($5,000) per month. The backstop will allow employers who otherwise would’ve had to lay staff off, to instead grant a leave of absence until shutdown orders are lifted.
Yesterday afternoon (Australian EST), the US senate signed off on an unprecedented $US2tn ($3.4tn) spending package. The bill will now move to Congress which is expected to pass it by Friday.
With lawmakers close to a deal, US stocks posted their first two-day rally since February 12 overnight — a sign of how equity markets have been clamouring for signs of government support.
When the deal was announced, the ASX briefly jumped higher in afternoon trade on the way to its third straight day of gains. Although it was one of the few bright spots across the Asia Pacific, where falls were led by Japan’s Nikkei Index.
The US measures include $US250bn for individuals earnings under $US75,000 who will be eligible for a direct payment of $US1,200. Another $US250bn has been allocated for unemployment insurance.
In Australia, welfare recipients and job seekers are set to receive a $750 one-off payment on March 31. A coronavirus supplement of $550 will also be available for eligible recipients for the next six months, which in effect will double the fortnightly Jobseeker allowance to above $1,100.
Desperate times call for desperate measures and Evans and Hanlan provided some useful context about what it will cost.
The two economists now expect to see a deficit of $90bn in 2019-20, followed by a deficit of $160bn for 2020-21, which will be equivalent to 8 per cent of GDP.
To finance that spending, they expect total government securities on issue to increase to around $820bn, up from $542bn as at June 2019.
Various state governments have also announced their own fiscal stimulus plans to support workers. And it’s all happening as the health crisis remains in an escalation phase, with the curve for positive COVID-19 tests yet to flatten out.
Will it work? Westpac says Australians still need to brace for the prospect of a “deep recession, and an associated sharp spike in the unemployment rate”.
But when it’s deemed safe to reopen venues and buildings, they expect production will “snap higher”. Offsetting the risk of bankruptcies, the move will imply “a period of sharp growth”.
However, “we would caution that the situation is very fluid. It remains highly uncertain how long the widespread shut-downs and cancellations wreaking havoc on the economy will persist”.
When it comes to the impact of COVID-19 on both people’s health and the broader economy, uncertainty is still the order of the day.
But for now, markets appear to be holding out hope that record government spending initiatives can shepherd the global economy through the other side of the crisis.