Terry McCrann: No matter how bad it gets, the economy will bounce back
Despite the bumpy ride ahead we will get to the other side of this economic disaster, however many measures need to be implemented by both the state and federal governments to get businesses through, Terry McCrann.
Terry McCrann
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The $1.7 billion the Victorian government will — initially — pour out to mostly small and medium sized businesses devastated by the flow-on from the virus is a sobering pointer to the huge sums the federal government is going to have to spend to help millions of Australians.
In my judgment that figure only starts at $100 billion and will inevitably spiral much higher.
Over the 2019-20 and 2020-21 fiscal years we are going to see budget deficits way beyond anything we’ve ever seen before and were utterly unimaginable as recently as Christmas when Treasurer Josh Frydenberg was still proclaiming his coming budget surpluses.
It’s not just the $100 billion-plus “anti-virus” spending — in the form of both direct spending and tax relief — that is going to send the bottom-line budget deficit soaring.
It is also the way “normal” government spending will surge and “normal” tax revenues will plunge as Australia spirals into its first recession since 1991 — and almost certainly a recession worse than that of 1991 when the jobless rate went to 11 per cent.
Ironically, in a sort of sick statistical joke, we were told only last Thursday that the jobless rate had actually fallen, to 5.1 per cent, in February.
If only we could go back to the world as it was even just five or six weeks ago. In five or six weeks, we are going to wish that we could have stayed in the world as it is right now. On both the actual virus front and in terms of the economic and financial implosions.
This is most certainly not to criticise the Victorian government or what it has done. It has acted promptly. It has targeted its relief where the greatest pain has hit. But it is quite simply pitifully inadequate.
Again, that is not a criticism. A state government has neither the means nor the job of spending the sorts of sums that the federal government will have to spend on direct support for both individuals and businesses.
Just look at the numbers. The state government will give back payroll tax. That’s around 5-6 per cent of a business’s wage bill.
If that business has lost 100 per cent of its revenue, how is that going to make the slightest practical difference to the business’s survival and keeping its workers in their jobs?
It would still have to sack 100 per cent of its staff to barely “break even” on those dollars — and that still wouldn’t account for rent and other outgoings.
That also shows what the federal government is going to have to do and the gigantic size of that inevitable commitment.
It’s going to have to be prepared to directly subsidise wages, rents and a host of other spending — and not just for business but even more for people directly.
While at the same time, to stress, its “normal” revenues will fall and its “normal” spending will rocket as the economy slides into recession. Or worse.
One of Australia’s smartest analysts and investors, Hamish Douglass — Australia’s “downunder Warren Buffett” — has flipped 180 degrees from his earlier (as in, like, four or so weeks ago) optimism.
Incidentally, it is a sobering exercise to look at your emails even just four weeks ago, far less back into the long, long distant past around six weeks ago. Virus? What virus? Oh, that one in way-off China. Market collapse? What collapse? To say nothing of toilet paper.
Anyway, Douglass is now predicting a likely, not recession, not serious recession, but outright depression, as the global economy goes into near total lockdown for two to six months.
I would add — without necessarily disagreeing — that much of it depends on China. There are signs of hope if China has really got on top of the virus, and if China manages to go back to work and not unleash the virus all over again.
Most importantly of all — to fight the virus itself but also to minimise the economic disaster — is if the rush to find a cure (that’s a cure, or an amelioration, not a preventive vaccine) actually succeeds and succeeds quickly.
Then the great American hi-tech powerhouse would swing into action — a 21st century version of America tooling up to win WWII — plus the productive might of China would combine to blanket the world with the cure.
That would instantly turn this into just another flu season. It could be all over in a couple of months. The economic and financial rebound would be mega-spectacular.
Investors need to keep that very, very much in mind. Our market, just around 5000, could go down towards or even through (unlikely) the 3100 hit at the depth of the GFC. But it could turn on a dime and shoot straight through 7000 — if we woke up one morning to a global cure.
And even without, we will get to the other side, however bumpy the ride.
FOUR BIG CERTAINTIES IN THIS BIG MESS
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