Hard Work Ahead

Even if this virus could be cured tomorrow, the economic recovery will be slow and arduous. Urgent reforms are needed for us to bounce back stronger. By Nick Cater.

The end of the endless highway is in sight, littered with the cans we’ve been kicking down the road for most of the century.

The missed opportunities for reform that have weakened our economic resistance now demand to be addressed. As Winston Churchill is supposed to have said: “Never let a good crisis go to waste.”

Already we sense a reordering of priorities as workers are laid off and economic activity slows. Nobody seriously wishes a recession, not even Paul Keating, who famously spoke of the last one in 1991 as the recession we had to have.

Nobody in their late 40s or older would wish a recession upon their children, knowing what it’s like to compete in a job market of shrinking opportunities.

Yet it is too early to abandon optimism. Governments can act in the short term to keep business in business and people in jobs. The Morrison Government’s measures are designed to do exactly that. The many stressed sectors of our economy need help to survive in hibernation, rather than allow them to shut down altogether.

Reserve Bank Governor Philip Lowe’s observation on Thursday that the hit to economic activity and incomes would last “for a number of months” may be the best-case prediction, but is hardly a wild one.

Falling demand for goods and services is driven by a passing threat, the imperative to control the spread of the COVID-19 virus which, one way or another, will eventually be contained.

A quick and widely available cure for the virus could remove that imperative as soon as it began, allowing us all to get on with our business. A quick cure using a re-purposed drug is not unlikely.

The anti-malarial drug, hydroxychloroquine, for example, sold under the name Plaquenil, has been shown to be highly effective at killing the virus in laboratory experiments and is already being tested on humans. The drug has been in common use since 1955 and is long out of patent.

There is a catch, however. Even if we were to rid ourselves of this virus tomorrow, an economic recovery may be slower than we would wish. Plaquenil, or whatever else ends the scourge of COVID-19, will not cure the political and economic maladies infecting world economies unrelated to the pandemic.

European economies were staring into the abyss long before the novel coronavirus jumped from bats to people, if indeed that is how the pandemic began. Italy has been on the verge of a recession for months, Germany is suffering from a shortage in investment and Boris Johnson’s Brexit-led revival of British fortunes had not even begun.

The impact of mistakes made after the 2008-09 Global Financial Crisis are still reverberating. Central banks around the world kept interest rates low for too long, seemingly unconcerned that the medicine was not working. Instead they drove an asset price bubble that increased the likelihood of a recession.

“A downturn will expose cracks in the business model of developed nations, even ones like ours”

Those maladies are present in the Australian economy too, as Andrew Stone outlines in his timely book Restoring Hope.

How well China recovers from the crisis is a matter of conjecture. We can safely assume the Chinese Communist Party will use every top-down trick in the central planning playbook and then some.

Yet these will only exacerbate the structural weaknesses that Chinese propaganda and massaged figures have failed to hide.

A downturn will expose cracks in the business model of developed nations, even ones like ours, that have been better managed than most for the past 35 years, and have been blessed by more than a little good luck from the development of neighbouring economies.

We too wrestle with broken monetary policy, lack of productivity, a sub-optimal but expensive education system and an ageing population.

We are experiencing the downside of globalised supply chains with the realisation of how heavily we rely on China and India for pharmaceuticals and other vital goods. All these are matters that deserve policy scrutiny.

There is nothing we can do to save Europe right now, and the path of China too is largely beyond our control.

But we must seize the moment to drive the reforms that increase our resilience and protect us against the next shock, in whatever shape it comes.

The Menzies Research Centre will do all that it can to lead and support such vital reform.