Is the ‘panic factor’ going to be the most costly outcome?

Australians are supposed to manage a crisis with grit, but COVID-19 comes at a time when mutual distrust seems rife

Woolworths has sold in four days the amount of toilet paper it normally sells in six weeks.

Australians are supposed to be laid-back during prosperity but manage crisis with grit and responsibility, rising to the occasion and putting lesser squabbles aside — yet the coronavirus outbreak will become a decisive test of how much our public culture has been damaged and poisoned.

This is not just a test of the Morrison government. It is a test of the wider political system and the leadership of the health system. Above all, it is a test of the public culture and the Australian people, a test of whether its response is defined by stupidity and panic or maturity and calm under pressure.

On display in the coming months will be how much disrespect, distrust, hostility towards authority and the culture of individualistic self-interest have damaged Australia’s capacity to respond as a rational community to the health and economic emergency.

“We all have a role to play,” Scott Morrison said towards the end of the week. Yet we are so jaundiced it sounded trite. Of course, it is the core truth. COVID-19 comes at a time when mutual distrust seems rife in the community and the sense of rising hatred is alarming and irrational.

How would Edward “Weary” Dunlop, Nancy Bird Walton, John Monash or Betty Cuthbert respond to this crisis?

The bushfires saw the best side of the Australian character — magnificent volunteers, spontaneous civil spirit and resilience amid ferocious inferno.

Yet COVID-19 is far more dangerous — elusive, complex, invisible, threatening death by stealth and demanding a widespread institutional response while threatening our economy, industries, business and investor and consumer confidence.

Experienced economist and principal with Deloitte Access Economics, Chris Richardson, told Inquirer: “This is a moment for the Australian public. The answer to this economic challenge lies very much with the public. We need a national effort or campaign to get people to calm down.

“The most desperate thing the country needs is a Bex and a good lie down. The main problem is panic and the question for government is: how do you fix this? The point is scared people and scared businesses don’t spend.”

A man loads up on toilet paper outside a Coles Express petrol station in Sydney. Picture: Bill Hearne

Many people won’t like such remarks. Public worry is justified and rational. But there is a difference between a rational and irrational response. The Australian economy is staring down the barrel of negative March-quarter growth and the risk, far short of any certainty, is a negative June quarter that would tip the nation into a recession after 28 years of world-record-breaking continuous growth.

Richardson puts numbers around the “panic” factor. He says the economy has been hurt by the drought, the bushfires and the coronavirus. “But the economy is actually in better shape than people think it is,” he says. He says the estimates from Treasury and the Reserve Bank about the impact on GDP equate to a national income loss of about $10bn, compared with the earlier estimate of about $6bn from Deloitte Access Economics, and he judges that the main element in the $4bn difference is the “panic” factor.

The government’s fiscal package is expected next week. Its scale has been increasing and was estimated on Friday “to be several billion or more”.

The problem is the escalating domino effect running through the economy and palpable fear at the spreading virus. In a bizarre event, Woolworths has sold in four days the amount of toilet paper it normally sells in six weeks.

Deeply aware of the confidence factor, Treasury secretary Steven Kennedy said on Thursday that “the economy is actually quite solid and travelling quite well”. With COVID-19 in more than 80 nations, a global response is being orchestrated involving central banks, governments and the International Monetary Fund.

“The risk is the sense of panic could get worse,” Richardson says. “At this stage the government doesn’t want to spend a cent on households. But confidence is the vital factor. I understand their fear of doing too much but the point about Labor’s stimulus in the global financial crisis is it worked.”

Richardson says the government’s package should also contain some funds for households — if you like, “calm down money”.

This is the first nation­al crisis since the political system lapsed into dysfunction more than a decade ago, plagued by public distrust, instability and polarisation. The dynamic has been apparent for some time, a decline in the culture driving dysfunction in politics.

Australia’s performance will reveal how much damage has been done to our ability to pull together as a unified community. The coronavirus is an event most people have not experienced in their lifetime. These health and economic challenges constitute a survival test for the Morrison government but also something bigger: a test of what has happened to our country.

Morrison’s handling of the crisis­ so far has been near faultless. But the hard part is yet to come. If he navigates this crisis as an effect­ive leader and averts recession, this will be the making of his prime ministership. The political upside for him could be enduring all the way to the next election.

His worst mistake would be to undershoot, do too little, see the economy sink into recession and hand Labor a devastating propaganda coup from which the governmen­t could not recover. ALP leader Anthony Albanese would have the perfect retort: Labor saved the public from a recession­ and the Liberals deliv­ered a recession.

Morrison needs to be bold but proportionate to the downturn. That’s hard because its scale is not yet apparent. Yet it will be finite and, at the end, the economy will bounce back. The Prime Minister said this week that the economic impact from COVID-19 was “equal” to the GFC of 12 years ago but with “very different causes” — a critical assessment. Richardson backs a fiscal package of about $4bn, saying, “the only meaningful number is what goes out the door in the next 12 months”.

Treasury’s Kennedy estimates the impact on tourism, higher education and some exchange rate effects­ will hit March-quarter growth by 0.5 per cent and the loss from the bushfires will be 0.2 per cent. The upshot is the March quarter looms as negative. The fiscal package will aim to keep the June quarter in positive territory. The Treasury is not forecasting a recession at this time.

Morrison is fixated on two ambitiou­s goals in tension with each other — to avert recession but keep the structural integrity of the budget. This is a difficult call. The COVID-19 downturn and fiscal package will send the budget into deficit. But Morrison wants to ensure that, with recovery, the budget returns to surplus, thereby avoiding the great blunder of the Labor years from which the Rudd-Gillard government never recovered — a budget sunk in a sea of red ink for years. Morrison believes in the virtue of fiscal responsibility, unlike Donald Trump.

The health threat is affecting hospitals, aged-care facilities, aviation­, schools, churches and CBDs. Personal precautions are essential but the spread of the virus is certain. “You can help by keeping calm,” Morrison told the public. “We all have responsibilities to play, to support each other, help each other, inform each other.”

All week, Josh Frydenberg worked to boost confidence. The Treasurer said the economy was well ­positioned for a “significant” fiscal package. The aim was to support business cashflows, keep ­people in jobs and promote invest­ment. The package will include an immediate investment allowance, a bringing forward of infrastructure projects, likely assistance for pensioners by reviewing the deeming rate, and support for industr­ies caught in the China-disrupted supply chain, spearheaded by the travel and trade sectors.

The aim is for a scalable package — to be increased according to events but to terminate when the worst is over. Kennedy addressed the confidence issue, saying it would be necessary to explain to the public “how well-placed the economy is to manage such a short-term shock and it will be a short-term shock, it will be longer than SARS but we will recover on the other side”.

The trouble, however, will be the psychological double hit — community fear from a spreading virus and a negative economic multiplier as businesses are hurt, the sharemarket panics and private­ sector forecasters lurch to pessimism.

Opposition Treasury spokesman Jim Chalmers has positioned Labor with flexibility in its response but also geared to the longer run. This is the key to Labor’s reaction. It means the party can give parliamentary passage to the government’s response but brand it inadequate. Long befor­e COVID-19, Chalmers put six proposals on the table for possible action: increase the Newstart Allowance, bring forward legislated tax cuts, incentives for business investment, new infrastructure, and revamped wages and energy policies.

“The problems that we have in the economy didn’t just show up the day that the coronavirus showed up and they won’t dis­appear when the coronavirus does either,” Chalmers told the ABC. His framework deals with demand­, investment and produc­tivity. It begins before the virus and is designed to extend beyond it.

Chalmers wants to challenge the government on economic policy­ and performance. This is a decisive shift in Labor’s economic priorities from the previous term. Chalmers’s focus is the below-trend growth before­ the virus, poor wages, weak productivity and weak investment, and the factors that drove the Reserve Bank to cut the cash rate by 0.75 basis points before the arrival of COVID-19.

Labor believes the flaw in the government’s outlook is that — business investment incentive aside — the bulk of its package will be temp­orary, its purpose being to combat the serious downturn, but that when the economy recovers the same problem of below trend growth will remain.

In short, Chalmers believes the economy faces two different challenges — the threat of recession and the longer-run threat arising from poor productivity that puts limits on the growth of wages and living standards.

Frydenberg challenges Labor’s diagnosis. He says the release this week of the December-quarter figures showing growth of 0.5 per cent, a touch above market expect­ations, verifies Reserve Bank govern­or Philip Lowe’s November statement that the economy had reached “a gentle turning point”, with signs of an improvement.

A feature of this week has been the consultation between the govern­ment and the bank — involving­ Morrison, Frydenberg, Kennedy and the RBA’s leaders, Lowe and deputy governor Guy Debelle — the upshot being the government and bank are aligned on the crisis. Fiscal and monetary policy are moving in the same direction­.

Announcing the bank’s 25-basis-point cash rate cut this week Lowe attributed the entire decis­ion to the coronavirus but was upbeat about the future. “Once the coronavirus is contained, the Australian economy is expected to return to an improving trend,” he said. Lowe pointed to a range of bullish medium-term factors — low interest rates, high infrastructure spending, the lower exchange rate, a strong outlook for resources, the expected pick-up in residen­tial construction, plus the coming fiscal package.

Frydenberg said real GDP growth to the December quarter at 2.2 per cent was above the OECD average and higher than every G7 nation except the US. The crucial issue, however, is whether the health contagion becomes an economic contagion that sweeps away these finer assessments from Treasury and the bank.

The government says upwards of 100,000 people have been infected­ worldwide with about 3250 fatalities and these are almost­ certainly underestimates. In Australia, 63 people have contracted­ the virus but the number grows daily. The IMF has announced a $US50bn ($75.6bn) finance assistance facility for low-income nations, with central banks and governments now involved in policy­ co-ordination.

The trouble is that central banks have little ammunition left for decisive interest rate cuts. This throws the onus on governments, the inexorable reality facing Morrison and Frydenberg. Speed is now the essence. It would be a mistake for Morrison to delay too long. The quantum will be vital. The risk the government faces is from a chorus of pessimists likely to dismiss the package as too small for the task.

Will the crisis create a sense of bipartisanship? The personal pol­itical rancour between Morrison and Albanese has been conspicuous in the current sitting. It would, however, be folly for Labor to run interference on the government’s package, most of which will be new spending and tax concessions. The crisis should be evaluated not just as a test for the government but for the parliament.

“We are not interested in solving the wrong problem,” Morrison said this week. His constant message­ is that the package will be targeted and temporary. He won’t blow up the budget and indulge in a huge cash splash.

But this is exactly what some of government’s critics want. In truth, there is vast scope for Morrison and Frydenberg to offer a substantial package but fall far short of Rudd’s stimulus that he likened to a “national security crisis”.