Bob Cunneen, senior economist and portfolio specialist, MLC Asset Management
This content is produced by The Australian Financial Review in commercial partnership with MLC.
History is scarred with dramatic events that can shatter economies and political systems. Just over a century ago, the terrible suffering of World War I and the Spanish flu pandemic marked the start of a tumultuous period for the global economy. Communism and fascism came to the fore as capitalism and democracy descended towards the abyss with the Great Depression in the 1930s.
Does the coronavirus pandemic in 2020 mark the starting line of another “low dishonest decade” that the poet WH Auden lamented of those times? Alas, we do not know what the long-term future holds.
So, is there any reason to hope of better times ahead? No-one can be sure.
There are promising signs this virus can be contained by effective public health advice, testing and tracing processes. Conversely, without a widely available vaccine, a return to our pre-coronavirus lives seems very distant.
Where business and consumers can draw some solace is central banks and government have recognised this health and economic crisis as a pervasive threat. The policy responses in terms of central banks expanding their balance sheets to support credit availability has been bold. The US Federal Reserve has expanded their balance sheet by an extra US$2.8 trillion or 14 per cent of Nominal GDP by buying government and corporate bonds as well as mortgage securities.
The Reserve Bank of Australia (RBA) has crossed the Rubicon by providing a “funding for lending” program to the banks to support business lending as well as buying government bonds to keep yields lows. While it’s only a modest 7 per cent of Australian GDP, the RBA is playing a constructive role.
Governments have also opened up their spending taps. Australia’s $214 billion in fiscal stimulus measures is at the modest end of the spectrum at 10 per cent of GDP compared to the US at 14 per cent and Germany at 28 per cent.
However, there is likely to be criticism from some on the effectiveness and scope of these stimulus measures.
The recent discovery of a $60 billion shortfall in Australia’s JobKeeper payment for example could be used to suggest the federal government could have been more generous in providing benefits to those employees of small businesses who did not meet the -30 per cent decline in revenue threshold.
As the pandemic continues there is likely to be persistent requests for the government to extend support benefits to those in the gig economy and recognise the dramatic loss of income for those in the arts and higher education sectors.
We also need to take into account that the coronavirus may have dramatically changed our behaviour for a very long time. The RBA’s May policy statement noted the “current economic disruption … could also affect mindsets and the behaviours of consumers and businesses”.
For example, will people continue to catch crowded buses and trains, or catch flights for business or holidays given the recent trauma? Arguably, business models for many industries have changed dramatically with this virus.
Global politics may also have been transformed by the pandemic. The peak in globalisation may have passed and an age of protectionism been initiated. Nations will look to become more self-sufficient in key areas such as food and health equipment.
President Trump’s “America first” rhetoric could potentially be echoed across the world as nationalistic voices try to rally voters with promises of keeping jobs at home. China’s status as the “factory to the world” is likely to diminish. Global corporations are likely to diversify their manufacturing bases to places like India, Indonesia and Vietnam to manage political risk.
Australia’s challenge is we are a very small economy heavily reliant on commodity exports, education and tourism. We try to “punch above our weight” but regrettably we do not have the reach and reflexes to mitigate all the blows of dramatic global economic and political changes. So the key advice to investors in these troubling times is to remain flexible and nimble to avoid being put on the canvas by this virus.