Business Daily Media

We're staring down the barrel of a technical recession as the coronavirus enters a new and dangerous phase

  • Written by Warren Hogan, Industry Professor, University of Technology Sydney
image

This week marks a new phase in the coronavirus crisis with the case count outside China accelerating sharply.

China’s containment strategy bought global health authorities time to prepare, but failed to confine the outbreak to North-East Asia.

In the past week both President Trump and Prime Minister Morrison have prepared citizens for a rise in the onshore case count in recognition of the likelihood the virus will spread to most of the world.

Because it isn’t possible to shut down the global trade and transport system without causing a global recession, their strategy has shifted from containment to preparation.

It’ll be important to manage panic

Critical to the process is managing panic. If consumers around the world substantially reduce their spending either as a precautionary measure or in response to public health fears, the impact on businesses will be substantial.

The key economic challenge will be to stop a vicious cycle of weaker spending and job losses taking hold. Targeted government spending can help businesses at risk, although some will use it as an excuse to reset their cost base and scale down in an economic environment that was challenging even before the coronavirus.

Global share markets have fallen 10% in a week as this new phase has begun to unfold, adding to uncertainty and fear.

Rate cuts are all but certain

Countries that have the capacity to cut interest rates will do it. In the US, markets are expecting a cut at or before the next meeting of the US Fed on March 17.

In Australia, markets are expecting a cut of 0.25 points at the Reserve Bank’s board meeting on Tuesday. There is some talk of a double cut, of 0.50 points, which would bring the Reserve Bank cash rate down from 0.75% to 0.25%.

The cuts would be aimed at shoring up confidence in the economy and financial markets as much as anything else. Global rates are already low enough to provide economic stimulus. It will be up to politicians to provide the targeted measures that will be needed to help keep businesses afloat and people in jobs.

We’re facing a Chinese recession

The trade and travel restrictions in place in and around China will have major ramifications. Estimates of the impact of the containment policies on Chinese growth in the first quarter of the year range from minus 2% to minus 10%, enough to obliterate growth in the world’s fastest-growing big economy.

A shocking Chinese purchasing managers’ index[1] reading on the weekend showed a fall to a new low not reached during the global financial crisis.

Few countries are as exposed to Chinese purchasing as Australia.

Read more: World economy flashes red over coronavirus – with strange echoes of 1880s Yellow Peril hysteria[2]

Australia gets GDP figures on Wednesday for the final three months of 2019. These are likely to show the economy grew by less than 0.5% in the quarter.

Most of the impact of the bushfires and the initial impact of the coronavirus will show up in the data for the first quarter of this year. Many analysts have pencilled in a negative number.

And possibly an Australian recession

It will leave Australia exposed to what is known as a technical recession – two consecutive quarters of negative economic growth, in the three months to March and the three months to June.

This possibility, Australia’s first recession in 29 years, will depend on how we react to the emergence of coronavirus onshore.

The initial reaction might paradoxically support measured economic growth as people stockpile supplies. The next phase would be a reduction in spending as people avoid leaving their homes. As we are seeing in China, and more recently in Korea and Italy, shopping districts can become ghost towns.

Read more: 3 ways coronavirus will affect the US economy – and 1 silver lining[3]

It would be akin to a nationwide rise in saving, which drains consumer spending and business activity. Beyond efforts to maintain perspective and keep calm, little can be done to prevent people from willingly choosing to remain at home.

We’ll need targeted, clever, government support

It is in this phase that government policy actions will be critical. A mild technical recession caused by an external shock would be undesirable but need not be a disaster for the community if the employment ramifications can be minimised.

Government efforts need to be directed at stopping a negative shock evolving into a self-reinforcing spiral of declining spending and lower employment.

Lower interest rates will be of very little use to start with. Governments will need to target support to those parts of the economy most under stress with the greatest risk of job losses.

The challenge will be to identify those businesses at the greatest risk of insolvency.

Read more: The growing impact of coronavirus on the global economy[4]

The Reserve Bank board will need to follow the lead of the US Federal Reserve and at least issue a soothing statement to financial markets that it is ready to act if needed.

If it is too early to gauge the impact of this new phase of contagion of the coronavirus, it is really too early for rate cuts. And there is a risk that a rate cut this week might generate more panic and amplify the effects of any consumer and business panic already upon us.

At most, the bank can support the government. It is our leaders who will bear the biggest responsibility for steering us through what’s to come.

Read more: 2020 survey: no lift in wage growth, no lift in economic growth and no progress on unemployment in year of low expectations[5]

Authors: Warren Hogan, Industry Professor, University of Technology Sydney

Read more https://theconversation.com/were-staring-down-the-barrel-of-a-technical-recession-as-the-coronavirus-enters-a-new-and-dangerous-phase-132752

Business Reports

Water education is key to creating sustainable communities

Water has shaped the unique landscape and the culture of the Northern Territory for over 60,000 years and is just as important today. Water is at the centre of the Territory lifestyle. In remote communities, preserving water hel...

Influential oil company scenarios for combating climate change don't actually meet the Paris Agreement goals, our new analysis shows

BP, Shell and Equinor all produce widely used scenarios of energy's future.Christopher Furlong/Getty ImagesSeveral major oil companies, including BP and Shell, periodically publish scenarios forecasting the future of the energy se...

How to Improve Marketing Strategy Using Surveys

Every business owner knows how important marketing is. However, there are more than a few ways to go about forming your marketing strategies. Many marketers will disagree on what the best approach is. However, there is one thing...

AirRobe and THE ICONIC Celebrate A Sustainable Milestone

AirRobe and THE ICONIC have unveiled a market-first feature that allows customers to add past orders made on THE ICONIC to their AirRobe Circular Wardrobe™ in one click.  The new ‘add past orders’ feature builds on THE I...

YouGov appoint Laura Robbie as CEO of the Asia Pacific region

A world of new opportunities  Market research and data analytics company YouGov is pleased to announce the appointment of Laura Robbie as CEO of the Asia Pacific region.  Miss Robbie previously held the role of Managing Di...

How to Sharpen Your App Development Skills

Mobile application development is a skill that you should take seriously. It's not the easiest task in the world, and it takes more than just technical know-how to be successful. If you want your app to succeed, you have to shar...

Web Busters - Break into local search

WebBusters.com.au