Canberra rolls out massive fiscal support as the Coronavirus Crisis (CVC) crunches the global economy.


    The government’s new JobKeeper payment combined a huge fiscal commitment of $130 billion with an equally radical policy commitment to try to keep Australians in work. Economists are now looking nervously at the implications of the ramp up in spending for government debt but a quick look at the numbers suggests no cause for panic. Meanwhile, consumer confidence continues to slump while a drop in auction clearance rates indicates the first cracks in the housing market.

    The Treasurer has moved to safeguard Australian assets from ‘fire-sale FDI’ effects. After tumbling to record lows in February, China’s PMI readings staged a welcome V-shaped rebound in March, although its far too soon to call any sort of real recovery, especially since global manufacturing PMI readings continue to tell a gloomy story. And after crunching some numbers, the OECD estimates that the initial direct hit to GDP due to official containment measures alone could be between 20 to 25 per cent of GDP for most economies. This week’s readings range across various Covid-19 related themes, including Australia in a post-virus world, the shifting role of the state, the impact on economics, and the transformation of the US Federal Reserve.

    Two other quick notes. I took a detailed look at the JobKeeper payment in this piece posted to our web site earlier this week. And we’ve started up the Dismal Science podcast series again, this time with the ambition to go weekly.

    What I’ve been following in Australia . . .

    What happened:

    The government announced a major new fiscal support effort for the economy in the form of a $130 billion wage subsidy program, taking total fiscal commitments (plus the RBA’s $90 billion term funding facility) up to an astonishing $319 billion or more than 16 per cent of GDP. Incredibly, with the first federal government fiscal stimulus package only announced on 12 March and this latest roll out of the JobKeeper payment (pdf) coming on 30 March, that massive ramp up in budgetary support has all been announced within the space of a handful of weeks.

    Why it matters:

    For a detailed analysis of the JobKeeper policy package and its implications, please see this piece posted to our web site earlier this week. But it’s worth noting there that the CVC is now producing a level of government policy intervention that dwarfs that deployed during the GFC.

    What happened:

    As the amount of fiscal firepower deployed by Canberra continues to grow, attention has turned to the potential implications for government debt and deficits. Some analysts are predicting an increase of up to $500 billion in government debt by the end of the next financial year. Why it matters:

    The projected additional budgetary expenditure announced over March 2020 comes to about $65.8 billion this financial year and $126.3 billion in 2020-21, with the big payments associated with the JobKeeper program accounting for about 60 per cent of total expenditure this year and more than 70 per cent next financial year. Along with what could be up to $35 billion in additional measures aimed at supporting the flow of credit, and over the forward estimates that totals to about $229 billion of GDP.

    Australia: Govt fiscal support for the economy announced 12 March 20

    December’s MYEFO had estimated that total government expenditure this financial year would be around $492 billion, rising to $510.5 billion in 2020-21 and $539.2 billion in 2021-22. With the new virus-fighting budgetary measures front-loaded, all else equal that would imply a boost to spending of more than 13 per cent this year and of almost 25 per cent next year.

    Australia: Projected budget expenditure to 2022-23

    Of course, all else won’t be equal. More realistic spending projections will need to consider the impact of a sharp downturn in economic activity on the MYEFO projections for government spending in terms of social security support and other payments that are heavily influenced by the state of the economic cycle. And that same downturn will also drag down government receipts. The result will be much larger fiscal deficits than implied simply by looking at the expansion in spending. Consequently, the size of the financing task, and the associated issuance of government debt, will also be much larger. Moreover, there could well be additional government stimulus measures yet to be delivered that would further add to the totals.

    As of March 27, the AOFM reported the actual face value of Australian government securities (AGS) on issue as $579.2 billion. The MYEFO assumed that the face value of AGS (the sum of Treasury bonds, Treasury Indexed bonds and Treasury notes) would rise from $556 billion at the end of 2019-20 to $558 billion in 2020-21 to $576 billion in 2021-22, while the market value of AGS was projected to rise from $646 billion to $657 billion over the same time period. (The face value of government debt is the amount that Canberra will pay back to investors at maturity, independent of any subsequent fluctuations in market prices. The market value represents the value of government securities as traded on the secondary market and fluctuates in line with changes in market prices.)

    Just the increase in budgetary support alone over the period until the end of the next financial year suggests that government debt would need to rise by almost $200 billion (roughly ten per cent of GDP) relative to the MYEFO projections. And as noted above, that will be a significant under-estimate relative to the actual increase once the hit to economic activity take its toll on the budget bottom line over the next 15 months. Hence those market projections of increases to MYEFO estimates of outstanding AGS starting at comfortably above $200 billion and rising to much more than that.

    What does that imply for our government debt profile? Net government debt is equal to the market value of AGS, government loans and other borrowings and deposits held minus the sum of cash and deports, advances paid, investments, loans and placements. The latest MYEFO estimated that net debt in 2019-20 would be $392.3 billion, or about 19.5 per cent of GDP. By 2020-21, the MYEFO projected net debt to have fallen to $379.2 billion or 18.4 per cent of GDP. The numbers set out above imply that Australia’s debt profile will now be significantly higher – by more than ten percentage points of GDP – over this period. A conservative estimate might be about 30 per cent of GDP, while some of the estimates recently published would suggest a substantially higher figure.

    Some good news for Australia is that we begin this process in decent shape, with a starting level of net debt that is much lower than that of many of our peers, and as a result that quantum of increase would still leave us with a debt position the envy of many other advanced economies.

    Advanced economics: Net debt as a share of GDP

    In addition, the context for the likely interest burden on this debt is one of very low borrowing costs. Further, with the RBA now intervening in the market to cap government bond yields as part of its yield curve control (YCC) program, the interest burden associated will likewise be capped, at least in the short- to medium-run.

    Australia: 10-year and 3-year govt bond yields and cash rate

    Even so, with governments’ worldwide all delivering their own fiscal support packages, as the scale of the projected global increase in government debt sets in, expect more discussion about the implications for future revenue measures, for bond yields, for financial repression and even (just maybe) inflation.

    What happened:

    After plummeting over the previous week, the ANZ-Roy Morgan Consumer Confidence index declined by another 9.8 per cent over the past week, taking it down to its lowest level since the survey began in 1973.

    Australia: ANZ Roy Morgan Consumer Confidence 2

    The weakest subcomponent of the survey was ‘current economic conditions’ which fell 9.5 per cent following last time’s 37 per cent fall, while ‘time to buy a major household item’ dropped by almost 24 per cent. ‘Current financial conditions’ were down 16.1 per cent, but in one (relative) bright spot, ‘future financial conditions’ rose 0.6 per cent.

    Why it matters:

    Consumer sentiment is now at its lowest level in almost half a century. That record low helps illustrate the severity of the economic crisis against which Canberra is now having to deploy the kind of massive fiscal firepower described above.

    What happened:

    The Treasurer has announced some temporary changes to Australia’s foreign investment framework. The changes mean that all proposed foreign investments into Australia subject to the Foreign Acquisitions and Takeovers Act 1975 (the FATA) will now require approval, regardless of the dollar value of the proposed deal or the nature of the foreign investor. The Foreign Investment Review Board (FIRB) has posted a Q&A about the changes here.

    Why it matters:

    Under the new measures, instead of the various dollar levels of screening that used to prevail for foreign investment subject to oversight under the FATA, the new screening thresholds are now zero dollars for all FIRB-related investments. While that represents a dramatic tightening in Australia’s foreign investment laws, the Treasurer stressed that this measure ‘is not an investment freeze’ but rather that these are ‘temporary measures’ that will remain in place during the current crisis, intended to ‘safeguard the national interest.

    One practical impact will be to delay many proposals, with the Treasurer stating that in order to allow enough time for screening applications, the FIRB will extend its timeframe for reviewing applications from 30 days to up to six months. However, the government will aim to ‘prioritise urgent applications for investments that protect and support Australian business and Australian jobs.’

    In the aftermath of the Asian financial crisis, economist Paul Krugman pointed out (pdf) that while the crisis had been marked by massive short-term capital flight, it had also witnessed a wave of inward foreign direct investment (FDI). Some of this new FDI represented a response to the IMF pressuring regional economies into liberalising their foreign investment regime. But Krugman argued that it also reflected the perception of many multinational companies that they would be able to snap up Asian companies and assets at ‘fire-sale prices.’ Krugman reckoned that the efficiency of fire-sale FDI depended on whether asset values during the crisis were slumping towards or away from their appropriate levels. If the former, then the FDI was likely to boost efficiency. But if the latter, and the transaction was just the sale of assets to owners who happened to have cash on hand, then there may be no efficiency gains and instead potential efficiency losses, as countries sold their family silver on the cheap. Some economists have been sceptical as to whether there is any real evidence of fire-sale FDI, but Canberra’s policy response here suggests that it is mindful of the risks. Moreover, it does seem quite plausible to argue that one impact of the CVC will be to (temporarily) push a lot of asset values away from their fundamentals.

    What happened:

    The RBA published the minutes of the 18 March Monetary Policy meeting of the Reserve Bank Board, providing an insight into the central bank’s thinking as to the package of measures it announced to help stabilise the economy.

    The minutes show that the RBA was concerned by the burst of financial market volatility that had seen sharp falls in the prices of risky assets as markets struggled to price unprecedented risks. The discussion highlighted that ‘liquidity in credit and money markets was very poor’, that ‘the market for corporate bond issuance was essentially closed to all but the very highest quality borrowers’, and that ‘government bond markets had displayed signs of dysfunction’ with even traditionally safe and liquid markets such as the US Treasury market affected.

    The RBA had already responded to these pressures by injecting liquidity through its open market operations and had announced that it would conduct daily operations at one- and three-month terms, and regular operations on terms of six months and longer.

    The discussion also saw members consider the implications of the situation for the real economy, viewing it as ‘very likely that most countries would experience a very sharp contraction in economic activity. In the case of Australia, the RBA felt that the although ‘it was not possible to provide an updated set of forecasts for the economy given the fluidity of the situation, it was likely that Australia would experience a very material contraction in economic activity, which would spread across the March and June quarters and potentially longer. The size of the fall in economic activity would depend on the extent of the social distancing requirements, and potential lockdowns, put in place to contain the virus.’ The central bank also thought that there ‘were likely to be significant job losses over the months ahead, although the extent of this would depend on the capacity of businesses to retain employees during this period.’

    The minutes also run through the four elements of the policy package announced on 18 March (the cut in the cash rate to 0.25 per cent, the ‘around 0.25 per cent’ target for the yield on three-year Australian government bonds, the term funding facility for the banking system with a focus on supporting lending to SMEs, and the remuneration of Exchange Settlement balances at the RBA at 10bp.

    Why it matters:

    The minutes provide additional insight into what was a historic meeting of the RBA monetary policy board, marking as it did both the fall of the cash rate to the effective lower bound and the introduction of unconventional monetary policy measures in the form of yield curve control.

    On the cash rate, the minutes report that ‘it was considered likely that the cash rate would remain at a very low level for an extended period. Members also agreed that the cash rate was now at its effective lower bound.’ Importantly, they also reiterate the RBA’s repeated view that it has ‘no appetite for negative interest rates in Australia.

    On the decision to target the three-year government bond yield, the minutes note that the choice of target reflected its ‘its importance as a benchmark rate in financial markets and its role in funding across much of the Australian economy’ while the level of target would ‘be consistent with the expectation that the cash rate would remain at a very low level for several years.’ As noted at the time of the decision itself, the aim was to ‘add to the downward pressure on funding costs for financial institutions, households and businesses.

    Finally, on the term funding facility, the minutes reiterate the twin objectives of (1) lowering the funding costs for the banking system to ensure a low cost of credit to households and businesses in line with the newly introduced policy on yield curve control targeting the three-year government bond yield; and (2) providing an incentive for lenders to support credit to businesses, especially SMEs, with members noting that ‘many small businesses would be likely to find retaining staff in the period ahead extremely challenging.’

    What happened:

    CoreLogic reported that Australian dwelling values continue to rise through March, with the combined capitals index up 0.7 per cent over the month and 8.9 per cent over the year, while the national index was up 7.3 per cent in annual terms. Values in Sydney were up 1.1 per cent over the month and 13 per cent over the year while growth in Melbourne was a little more moderate, with the index up 0.4 per cent over the month and 12 per cent over the year. All other capital cities also recorded a positive monthly increase except for Hobart, where values slipped 0.2 per cent.

    Australia: CoreLogic Hedonic home value index, combined capitals 2

    The March results left dwelling values at their peak in Melbourne, Brisbane, Adelaide and Hobart, and only 2.7 per cent off their peak in Sydney, while values in Perth and Darwin remained stuck well-below their previous highs.

    Why it matters:

    Although the headline numbers for March painted a picture of continued resilience in much of the Australian housing market in the face of Covid-19, CoreLogic points out that the second half of the month ‘experienced a weakening in the growth trend as confidence slumped and social distancing policies took effect.’ Another sign of looming weakness was the fact that the national March reading was the lowest monthly gain since July 2019, when the market started to recover last year.

    At this stage, CoreLogic’s view is that housing values are likely to be more insulated from the damaging impact of the CVC than the volume of market transactions: certainly, government stimulus spending, record low interest rates, and the promised forbearance on the part of lenders should all offer some support for house prices, while government measures (as discussed last week) and the blows to consumer confidence and household incomes will stifle transactions. And indeed, falling transactions are already showing up in slumping auction clearance rates in the first signs of cracks appearing in the housing market.

    Australia: CoreLogic Auction national weekly clearance rates

    That said, however, it’s also clear values cannot be immune under these circumstances. Like many of the other economic impacts from Covid-19, the direction of travel from here is depressingly obvious in the near-term, but the ultimate fate of the housing market will depend in large part on how long the current crisis lasts, and then on the nature of the subsequent recovery.

    What happened:

    The ABS said that it will release a second tranche of new statistical products to help track the impact of Covid-19 on the Australian economy. The new products will supplement those announced on 16 March and will include:

    • Additional survey data on employment and health implications for households, to be published mid-April.
    • Results from a second round of the Business Impacts of Covid-19 survey are expected in the week of 6 April.
    • New preliminary monthly estimates for merchandise trade will be published three weeks after the end of each month. The first release is scheduled for 23 April.
    • Confidentialised business microdata for financial year 2018-19 will be available by the end of April.
    • Interactive age and health conditions maps showing the geographic distribution of Australia’s population by age and health conditions will be released in the week beginning 6 April.

    Why it matters:

    The ABS continues to work hard to provide analysts with additional data resources at a time when the value of rapid access to key trends and development is particularly high.

    What happened:

    According to the ABS, dwelling approvals jumped by 19.9 per cent in February, reversing a 15.1 per cent fall in January and leaving the number of approvals down 5.8 per cent over the year. That big monthly increase reflected a huge 61.7 pe cent jump in approvals for units (particularly in Victoria which saw a very large rise from a low base in January), while approvals for private sector houses were down 0.8 per cent in February.

    Why it matters:

    Like many of the data releases we’ve been seeing from the first two months of this year, February’s numbers are a look back to the pre-CVC economy. In this case, they are telling the story of the recovery in the housing sector that had been expected to play out over the course of 2020, with a subsequent pick up in construction activity. Now, however, we are in very different times, with a new set of powerful headwinds hitting the sector.

    . . . and what I’ve been following in the global economy

    What happened:

    China’s official PMI showed manufacturing activity returning to positive territory in March, bouncing back from the record low of 35.7 recorded in February to 52. The reading for services also staged a sharp recovery, with the PMI for non-manufacturing rising from 29.6 to 52.3, according to China’s National Bureau of Statistics (NBS).

    China: Official PMI

    A separate, private PMI survey (the Caixin/Markit PMI) for manufacturing also rose in March, rebounding from its own record low of 40.3 in February to 50.1 last month.

    China: Calxin Manufacturing PMI

    Why it matters:

    Readers might remember that a few weeks ago we used the dramatic slump in the January-February PMI results for China as a gauge not only of the impact of measures to tackle Covid-19 on the Chinese economy, but also as a leading indicator of what other economies might expect to see as their own physical distancing measures and lockdowns went into effect.

    The good news here, then, is that the official PMI results for Chinese manufacturing were much better than expected: market economists had expected a recovery from the January-February low, but only to 45 instead of the much stronger reading of 52 we got. The private Caixin PMI for manufacturing also surpassed market expectations, hitting 50.1 instead of the consensus forecast of a 45.5 print. The Caixin PMI mainly captures SMEs and export-oriented businesses while the official PMI results are relatively more representative of larger businesses and state-owned enterprises (SOEs), so the gap between the two readings may indicate that smaller firms and the private sector are doing it tougher than larger firms and SOEs.

    There are plenty of grounds for caution before we can declare that China is about to enjoy the much-sought after V-shaped recovery that is every economic policymaker’s dream scenario right now, however. For a start, the NBS itself stressed that the March figures reflect the (indeed positive news) that more than half of the surveyed enterprises have resumed work and production but that this did not mean that China’s economic operation had returned to normal.

    It’s also important to remember that the PMI indicators are signalling a recovery from February’s dismal result, rather than a durable recovery overall. As the suppliers of the Caixin/Markit data have pointed out, both the rebound in the reported PMI for China and experience from 2008-9, highlight how data tracking month-on-month changes in variables such as production rarely stays at historically low levels for long during times of especially steep drops in production. But, they continue, it is also important to recall that the indices need to move significantly above 50 to indicate any recovery of the output lost in the prior month: a reading of 50 (signalling no change) would be achieved even if all factories closed one month and remained closed the following month. Thus, although the extent of the rebound signalled by the rise in the Caixin PMI output index for China was indeed V-shaped (up from 28.6 to 50.6), Markit cautioned that the context for this rebound was that the February reading had been by far the lowest in the near 16-year history of the survey, and that the March reading therefore indicated that production in China had only risen marginally after plunging in February, in turn suggesting only a limited impact from factories reopening after virus-related closures in February.

    Finally, China’s manufacturing production will also have to cope with the hit to external demand due to the spreading global economic disruption (see below): the PMI reading for new export orders also staged a recovery in March, but remained in stuck in the negative territory it has inhabited for much of the time since the start of the US-China trade war.

    China: Official PMI

    Actual data on industrial production in March, due in a couple of weeks, will provide us with more information here. Still, with economic good news in short supply right now, we’ll take what we can get.

    What happened:

    The JP Morgan/Markit global manufacturing PMI for March recorded an index reading of 47.6 in March, up from 47.1 in February.

    Global: JP Morgan Global Manufacturing PMI

    Unfortunately, the bounce in the headline reading was wholly driven by the stabilisation in China discussed above. Of the 30 countries for which PMI data had been published at the time of writing, only China had reported a PMI output index in excess of 50, signalling a month-on-month increase in production. The rest of world saw the biggest production fall since April 2009 as global manufacturing orders fell at the steepest rate for 11 years. And none of the 30 countries reported higher order book volumes.

    Worldwide trade flows also continued to deteriorate at the fastest rate for over a decade.

    Why it matters:

    Although the headline result indicated a mild easing in the rate of decline in manufacturing in March, the latest reading was still the the second lowest since May 2009 and as such signalled a steep deterioration in the health of global manufacturing for a second successive month. And as noted above, if China is excluded from the calculations, global output fell at the sharpest rate since April 2009, with the steepest decline reported in hard-hit Italy.

    Moreover, Markit warns that even this weak March reading masks the scale of the true downturn in manufacturing, as the PMI includes a measure of supplier performance as one of its five components. In normal times, longer deliveries are typically a sign of a busier economy, and hence contribute positively to the PMI reading. But now delivery times are lengthening because of virus-related shutdowns, not because factories are struggling to accommodate soaring demand. This provides a false 'boost' to the level of the PMI. Both output and new orders fell at faster rates than the headline PMI, which Markit suggests provides better insights into the true scale and depth of the recent collapse in production and demand. The monthly drop in worldwide factory production was the second steepest since April 2009, while the drop in new orders was the largest since March 2009.

    What happened:

    The OECD has released new estimates (pdf) of the potential economic impact of government measures aimed at containing Covid-19, including a potential loss of more than 22 per cent of GDP for Australia.

    The OECD’s approach is to look at detailed categories of output and then identify the sectors it thinks are most directly affected by official containment measures:

    • Activities including travel and tourism, and those involving direct contact between consumers and service providers such as hairdressers or home purchases.
    • Most retailers, restaurants and cinemas, with the partial exception of some takeaway and online sales and delivery.
    • Non-essential construction work.
    • The direct impact of lockdown measures is expected to be more muted in the manufacturing sector, although complete shutdowns have happened in producers of transport equipment reflecting disruption to global supply chains.

    Collectively, these sectors account for between 30 per cent and 40 per cent of total output across most economies. Assuming partial shutdowns in some sectors, the estimated initial direct hit to GDP across the OECD's sample of economies is mostly around the 20 per cent to 25 per cent of GDP range, although at the extremes the projected damage ranges from a low of around 15 per cent in the case of Ireland up to more than 34 per cent in the case of Greece. The OECD estimates that the potential hit to Australia would be a little over 22 per cent of GDP.

    OECD and non-OECD G20 Economics: Potential impact of shutdowns on economic activity

    Why it matters:

    While the OECD estimates are only indicative, they are a useful baseline. They also suggest a scale of losses to economies that is much larger than that suffered during the GFC. Moreover, the estimates only cover the initial impacts on the level of output in the sectors involved and does not include any indirect impacts.

    The OECD judges that its results are equivalent to a decline in annual GDP growth of up to two percentage points for each month that the strict containment measures continue. So, if the shutdown were sustained for three months with no offsetting factors, annual GDP growth could be between four percentage points to six percentage points lower than it would otherwise have been. The OECD also points out that this message of sharp declines in activity in response to government measures is consistent with the data we’ve seen from China and from the early readings from global business surveys such as the PMIs discussed above.

    What happened:

    The New York Fed has introduced a new Weekly Economic Index (WEI) designed to move closer towards analysing the US economy in ‘real time’. Drawing on an eclectic mix of indicators including initial unemployment claims, raw steel production, a daily consumer survey and US fuel sales to end users, the index runs from January 2008 to the present. The WEI is scaled to four-quarter GDP growth so that a reading of (say) two per cent in in a given week means that, if those weekly conditions persisted for a full quarter, we’d expect to see two per cent growth over the year.

    US: New York Fed Weekly Economic Indicator

    The current readings for the index show last week’s huge surge in US initial unemployment claims driving the WEI down to a level last seen during the GFC.

    Why it matters:

    As we noted a couple of weeks’ back when describing the first tranche of new products that the ABS was introducing to measure the impact of Covid-19, the lagged nature of economic data means that trying to navigate current economic conditions based on official data releases is often likened to driving while looking only in the rear view mirror. In normal times, that’s usually not a major problem, and the standard indicators do a decent job. During periods of rapid and dramatic change, the premium on finding more timely indicators of what’s happening in the economy rises markedly.

    The CVC has produced an extreme version of that challenge, with huge swings in economic conditions over a very short time period. Financial market indicators are of course easy to find and available at a high frequency. But in their search for indicators of real (as opposed to financial) economic activity, economists have found themselves resorting to a whole set of new indicators including online bookings, traffic congestion readings and other high frequency data. The NY Fed’s new indicator is a neat example of that creativity in action.

    What I’ve been reading

    This is Treasury’s useful summary (pdf) of the government’s policy response to the CVC to date. Page eight has a very helpful outline on the timing of the measures, followed by a detailed breakdown by timing, dollar amount and proposal.

    Allan Gyngell on Australia in a post-Covid-19 world. Great opening: ‘Every Australian national security document of the past 20 years listed pandemic disease as a threat, yet Australia still found it hard to step from prediction to planning. It should not make the same mistake in thinking about what comes next.’ The key judgement here is that ‘Australia is likely to find itself in a weaker overall position in the post-coronavirus world.’ The bilateral relationship with China will be harder, the multilateral institutions most important to us will be weaker, and the ‘coming financial shock wave’ will challenge two key pillars of our Indo-Pacific strategy – Indonesia and India.

    John Kehoe tells the story of the origins of the government’s ‘hibernation’ strategy.

    Peter Whiteford and Bruce Bradbury analyse the Coronavirus Supplement. As well as pointing out the (temporary) transformation in Australia’s OECD ranking in terms of the generosity of its social security payments, they also highlight the scale of the delivery challenge, noting that an ‘extra one million recipients (the treasurer’s estimate) would mean that the share of the working age population receiving income support climbed from 14.2 per cent to 18.7 per cent, an increase of 4.5 percentage points, which is bigger than the 3.5 and 3.8 percentage point increases during Australia’s two previous post-war recessions in the early 1980s and early 1990s. In both these earlier recessions, the unemployment rate shot up from under 7% to near 10% or higher within a year. The current increase will take place in the next six months, rather than over a full year.’ Related, here is Whiteford again, this time with Miranda Stewart, writing in the AFR on the challenges posed by the scale of the increase in welfare payments.

    The Economist magazine has been tracking the huge – and still growing – amount of government intervention deployed to battle the CVC.  This early briefing from 19 March noted that in ‘just a few days’ many governments in the rich world had shifted to what looked akin to a war footing, ‘promising massive state intervention and control over economic activity.’  This more recent briefing from 26 March again starts from the premise that the response to Covid-19 has been bigger and more radical than that to the GFC, but goes on to argue that the increased role of the state is set to persist, since perhaps ‘the most important lesson of 500 years of history…is that nothing has helped boost state power in Europe and America more than crises.’  Mostly those crises have been wars, but the CVC could have a similarly long-lasting impact.  Some of that will be quantitative: the article estimates that the combination of stimulus plus falling nominal GDP over the next few months will see government spending as a share of GDP in rich economies rise from about 38 per cent last year to more than forty per cent.  But the bigger change could be qualitative, by creating new expectations about the role of the state and its attitude to risk.

    From Bloomberg, how the coronavirus has upended economics in just a few weeks. Debt and deficits and maybe the monetisation of both likely lie ahead. Related, Mohamed El-Erian reckons that in the search for economic answers, economists in the developed world might benefit from turning to development economics.

    The World Bank has published its latest regional economic update for East Asia and the Pacific. The update presents two scenarios, a baseline scenario which envisions a severe slowdown followed by a strong recovery and a lower-case scenario under which the pandemic lasts longer and has more severe effects, leading to a deeper contraction and a more sluggish recovery. According to the Bank, economic growth in China is projected to decline to 2.3 percent in its baseline forecast and 0.1 percent in the lower-case scenario in 2020, from 6.1 percent in 2019. Growth in East Asia and the Pacific excluding China is projected to slow from 4.7 percent in 2019 to 1.3 percent in the baseline scenario and to negative 2.9 in the lower-case scenario in 2020 and is projected to rebound gradually in 2021 as the effects of the virus dissipate. Under the baseline growth scenario, 24 million fewer people will escape poverty across the region in 2020 than would have in the absence of the pandemic (using a poverty line of USD5.50/day) while under the Bank’s lower-case scenario, poverty is estimated to increase by about 11 million people. Prior to Covid-19, projections estimated that 35 million people would escape poverty in the region in 2020, including over 25 million in China alone.

    John Cassidy in the New Yorker argues that the most effective fiscal stimulus is doing whatever it takes to control Covid-19.

    The IMF sets out economic policies for the war on Covid-19 (I like the table – nice summary).

    Above, I referenced Allan Gyngell’s point about the ubiquity of pandemic risk in Australian national security assessments. The New Statesman applies a similar lens to the UK to ask why wasn’t the country better prepared.

    Martin Wolf frets about the tragedy of two fading superpowers.

    This one is for listening, not reading: Talking Politics’ David Runciman in conversation with historian Richard Evans about the story of cholera epidemics in the nineteenth century and possible lessons for today. For those who prefer reading, there’s this Q&A with Evans in the New Yorker. The discussion on the ‘medicalisation’ of the nineteenth century and our evolving attitude to doctors was quite striking.

    And here is Runciman again, this time in the LRB where he examines timing, politics and Covid-19.

    The US Fed – now even more the world’s de facto central bank than before – has been doing some incredible things during the CVC. This piece from the WSJ describes the remarkable transformation of the Fed under Jerome Powell.

    Also from the WSJ, an interesting look at Amazon in the time of the coronavirus.

    The Atlantic thinks it can detect a social-distancing culture war in the United States.

    Wired magazine reflects that all of those popular post-Apocalyptic books, movies and tv shows did little to prepare us for our current reality. I like the line, ‘this apocalypse is less Danny Boyle and more Douglas Adams.’

    Hugh Mackay on how widespread social isolation might change us.

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