Recovery from second wave depends on containing virus

Australia’s second wave will come with a fearful price — not just more infections but signs of psychological resistance.

Illustration: Eric Lobbecke

Australia’s second wave of COVID-19 will come with a fearful price — not just more infections but signs of psychological resistance, the erosion of political concord and fresh lockdowns that will damage recovery, cost jobs and impose a deeper financial burden on the Morrison government.

We are being split into two ­nations, Victoria and the rest, a situation without precedent for a century. The border closures arising from the health imperative have a wider meaning. Every sign is that our unity in success is being replaced by recrimination in the second wave — a potent threat to economic recovery.

Scott Morrison tries to temper the angst with his declaration that “we’re all Melburnians now”. But that’s not how much of the country is reacting. While the Prime Minister preaches unity — and he is right to do so — the failures of the Andrews government will be borne by Morrison in a more impaired economy, a higher fiscal cost and signs that agreement over national economic reform may be a forlorn hope.

Josh Frydenberg says the Victorian lockdown will cost the economy about $1bn a week or $6bn across the six-week ­period. But the real damage will far exceed this. This is a sledgehammer to Australian confidence. The nation is being taught a lesson — this virus will punish community complacency and government arrogance in many multiples. The sense of national self-congratulation, almost pride in fighting the virus, is shattered.

The risk as borders close against Victoria is that the wagons are circling. Retreat to tribal, class, party and state interests is the ghost that haunts Australia. The ultimate danger is that the nation buckles and reverts to the policy gridlock and polarised politics that drove our underperformance for the past decade. This must be avoided at all costs; it will be a test of all institutions and elites.

This doesn’t have to be the outcome because Australia, before Victoria’s second wave, was doing relatively well in health and economic terms. Deloitte Access Economics partner Chris Richardson tells Inquirer Australia can combat the economic negative from Victoria. With Deloitte forecasting gross domestic product to contract by 3 per cent this year he estimates the Victorian lockdown will have a marginal impact, taking the contraction to 3.25 per cent or 3.5 per cent.

The certainty, however, is that the federal Treasurer’s July 23 statement about how to combat the economic “cliff” come the end of September is now more complex. Frydenberg has no option — he must spend more on a redesigned JobKeeper, now financing 3.3 million people, or a new scheme given this hit to recovery. Meanwhile, this week banks announced a vital part of the bridge over the September cliff by extending their loan repayments deferral, now covering 800,000 customers, for a further four months, reaching into the new year but restricted to those still under pressure.

The test now is whether the Morrison government can keep its authority for resolute policy action given the rising danger from poisonous politics lurking at the door of economic recession. Six months after the pandemic landed in Australia, the most vital border along the Murray River is closed. Five million Melburnians are in lockdown, some of them in ugly conditions. Many businesses and jobs will not recover. Resentment is palpable.

This is not what Morrison envisaged when he said “outbreaks” were certain in the recovery. He wanted to avoid any “stop-start” process but this is what now torments Victoria and hurts Australia. It is not good enough; Morrison, the national cabinet, premiers and Health Minister Greg Hunt need a better system to check outbreaks at an earlier stage. This is exactly where Victorian Premier Dan Andrews has blundered. Excusing Andrews by saying this outbreak could have happened in any other state misses the point. It didn’t. Victorian government mistakes — defective hotel quarantine, poor contact with multicultural communities and inadequate tracing — turned an outbreak into a second wave. The firestorm about the accountability of the Andrews government is inevitable.

“We are in many respects in a more precarious, challenging and potentially tragic position now than we were several months ago,” Andrews said this week. “There’s no alternative other than thousands and thousands of cases and potentially more, many more, people in hospital.”

On Friday there was a record 288 new cases in Victoria. ­Andrews is a study — arrogant in success, arrogant in failure. But here’s the dilemma — the blame game doesn’t work. Morrison knows this. Using the virus to pursue ideological antagonisms is probably inevitable but it has a sure consequence: it hurts public confidence and the cause of economic reform. It doesn’t help ­Morrison.

Business Council of Australia chief executive Jennifer Westacott tells Inquirer: “We have to find a better system for managing outbreaks. We have to give the community confidence because we are going to be living with this for quite a long time. An extreme stop-start approach will destroy confidence and kill job creation. We have to get a system in place to manage outbreaks as they occur. A blame game is not a solution. We have to identify what has gone wrong and fix it. We need a system that shows we know how to manage those outbreaks because they will continue to happen.”

There are three conclusions. First, no economic recovery is possible without containing the virus. Second, the return to “normal” must incorporate social distancing as the new “normal”, and that means ignoring those experts preaching the two phony strategies of total elimination and herd immunity. Third, Australia must learn from Victoria’s failure — as Westacott says, our plans to check outbreaks must be enhanced as a priority. Perhaps the other premiers are getting it.

In relation to his July 23 economic statement addressing the post-September cliff, Frydenberg tells Inquirer: “The Prime Minister and I have made clear there will be another phase of income support. We will stick by the principles of our earlier announcements — it will be targeted, temporary, proportionate and use existing systems. We had the back of the Australian people going into this crisis and through this crisis, and we will coming out of the crisis. The government will continue to provide the support that is necessary.”

This is a decisive pointer. Support will be provided on the same policy principles as applied to JobKeeper from last March. Frydenberg has put on the table the option of bring forward stage two of the already legislated personal income tax cuts, a crucial step that Labor would presumably support.

“The public voted for those legislated tax cuts and our focus is ensuring that more people will have more money in their pockets,” Frydenberg says. “We are examining our options about how to boost consumption and investment. The Victorian situation impedes national economic recovery and affects both the speed and trajectory of recovery. Victoria will be behind the rest of the pack in opening up its economy and we are factoring this into our decisions.” Yet Frydenberg made it clear this demands a delicate balance. JobKeeper is worth $70bn over six months or a mammoth $12bn a month.

The claim by ACTU secretary Sally McManus that the $1500-a-fortnight scheme be fully extended for a further six months is untenable. If you want context, our politics went into meltdown a few years ago over the cost of a corporate tax cut worth $11bn ­annually — roughly what JobKeeper costs monthly. That’s how much the parameters have ­transformed.

“It’s not a blank cheque and it’s not unlimited,” Frydenberg says of JobKeeper. “Ultimately there needs to be an end date. There is no money tree. We are absolutely committed to the structural integrity of the budget. We have to think about ensuring the private sector, consumers and businesses maintain confidence because the recovery is a confidence game.”

Richardson says he backs ongoing fiscal support but that bringing the tax cuts forward is a less than optimal solution: “The test now is: for every extra dollar of government support, how much gets spent? That’s what we need to keep the wheels spinning. With the tax cuts, some won’t be spent. Infrastructure, social housing and assistance to the poorest people are more effective. If the government does everything else and also brings forward the tax cuts, that is a grand thing — but not if the tax cuts come at the cost of ­better measures.”

Richardson warns about “phantom menaces”. Menace No 1 is the debt, notably that “we have to raise taxes and cut spending to fix the budget”. He brands this “completely wrong”. He also hammers the Treasury axiom: if we can repair the economy, then we can repair the budget. This is the Morrison-Frydenberg position; it is why Morrison is so focused on opening up the economy.

In terms of the debt, Richardson says the bonus will be ongoing low interest rates: “Interest rates will be nailed to the floor for years. That’s because, one, this is a big ­recession; two, inflation is as dead as a door nail; three, governments will bow out of their support, leaving it to central banks to repair economies; four, economies are more accident-prone than ever before, so central banks will be super cautious; and finally because, five, interest rates are more powerful than ever.”

Richardson says that “last point is important to understand”. Given the high debt-to-income ratios in most countries, it means that even if interest rates “go up just a bit” it will have a disproportionate dampening impact on economies. That will reinforce central bank caution.

Frydenberg says it is “critical” to ensure the second wave does not spread to NSW: “It’s critical to recovery, critical to consumer and business confidence and critical to our ability to deal with future breakouts.” The issue is whether the second wave afflicts just 20 per cent of the economy or 55 per cent. When she closed the border, NSW Premier Gladys Berejiklian nailed the issue — community transmission in Victoria.

“We’ve not seen anything like this,” Berejiklian said. “It’s actually a new phenomenon in Australia. This is unprecedented in Australia. That is why the decision of NSW is unprecedented.” After the three-way hook-up between Berejiklian, Andrews and Morrison, the Prime Minister folded on his previous position. “We agreed that now’s the time for Victoria to isolate itself from the rest of the country,” Morrison said.

He said later his support for open borders had not altered.

That’s important. Provided the rest of the country can deflect the second wave, then internal borders — Victoria excepted — should be opened. It is significant that at week’s end the second most important border, between Queensland and NSW, reopened — a sign of confidence in the non-Victorian economy. Any retreat on this front would be a calamity.

The moral is that economic recovery must be built on containing the virus. “The best economic response is an effective health response,” Frydenberg says. “Only when you have the health aspects of the crisis under control can you reopen the economy.”

In this context the gravity of America’s mistake looms large — it reopened before the virus was contained.

A critical aspect of the September transition came this week when the banks announced their four-month extension on deferred loans.

This is an important concession but not a free kick. Those customers able to restart paying their loans will be expected to do so. The four-month extension is not automatic.

The banks estimate around 45 per cent of the 800,000 individuals and businesses enjoying deferments will be able to restart making repayments. The rest will work with banks to restructure their loans or be extended the new deferment. Australian Banking Association chief executive Anna Bligh says the aim is to “avoid a cliff for customers in September”.

To this point in the COVID crisis, the banks’ deferment ­“penalty” for their bottom lines has been the restoration of their reputations. Bligh tells Inquirer: “If the banks had not been in a position to act as shock absorbers then the shock would have been absorbed by households and business, small and large.”

ANZ chief executive Shayne Elliott told the ABC: “We can’t save everybody but we can save a lot of people.” The four-month extension would assist “people who have positive prospects of getting back into employment and getting their business started again”.

But Elliott warned that some business and homes would not survive. “This is not a ‘get out of jail free’ card,” he said. “But if it’s the right thing to call it a day and say this business isn’t viable or your home isn’t viable, then it’s sadly our responsibility to have that conversation.”

Borrowers are being put on alert. The difficulty, as Bligh says, is that the business of banks is risk assessment but the current situation is “totally unprecedented” for ­assessment of risk.

Reflecting on the meaning of the crisis for the banks, Bligh says: “How did banks come into this crisis? I think there are two very big factors. On the financial side there have been 10 years of global prudential reform motivated by the GFC. We have had a decade of prudential regulatory requirement that banks hold more capital than they had ever previously been required to hold.

“So, the banks came into this crisis better capitalised with stronger balance sheets than they have ever had. On the financial front they had the capability and the firepower. Second, they came into this crisis with the memory of the (Hayne) royal commission fresh in their minds. Its report was only 12 months old — and banks have spent the past two years ­having a long hard look at themselves.

“Probably one of the catchcries of the royal commission was that banks, holding a privileged position in society, should ensure they meet the expectations of the public.

“So banks came to the crisis through the lens of: what does the community need and what do they expect of us? It was the intersection of these two factors that has driven the banking response.”

But the issue for banks, like government, as providers of ­financial support during the crisis, is the management of the transition when support must be withdrawn and a path to normal — or some form of normal — is renegotiated. The real pain from COVID-19 lies ahead, even after beating Victoria’s second wave.