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Stimulus analysis: How far will governments go to bring the system back to life?

Today’s global governments are mitigating the COVID-19 downturn by passing historically massive stimulus packages, which would otherwise be contradictory to their political beliefs and agendas. 
Today’s global governments are mitigating the COVID-19 downturn by passing historically massive stimulus packages, which would otherwise be contradictory to their political beliefs and agendas.  The conservative Morrison government has poured 3.3% of Australia’s GDP into the coronavirus response and that will go up to 6.1% next year. This totals to around $7600 per person. Many of the government’s measures benefit people already receiving welfare payments and low income earners who have lost their jobs due to coronavirus.  The ALP’s response during the GFC was about 1.8% of the economy, much of it within one year. Across the pond, the US has passed, 96-0, a $2.2 trillion rescue package for the economy with measures including: 
  • A one-off $1200 cash payment for every adult who earns under $75 000
  • Unemployment benefits of $600 per week (a figure that exceeds many low income earners regular weekly wage) 
Hundreds of billions in loans for businesses and state and local governments to avoid wage and budget cuts Some of us are asking ourselves whether the governments have acted fast enough, but a more interesting question may be, will this be the end of it or are they prepared to pass stronger measures in the future?  COVID-19 is already changing the world we live in. The economy has taken a massive hit, with stocks plummeting, and those who are set up well to deal with the crisis by working from home or changing their business model have the strong footing. The world has been turned upside down, and the governments’ stimulus packages may well be an important part in determining where value will be placed in the future.  To understand just how massive the response to the COVID-19 crisis has been, it’s interesting to look at how today’s US stimulus package compared to the enormous stimulus package during the GFC.  How do these measures stack up to GFC stimulus? The US’ $2.2 trillion package is a surprisingly expensive package considering the one passed under the Obama administration in 2008.  Christina Romer, the Chief Economist at the time, was tasked with putting together some stimulus options that would repair the economy by Q1 2011.  She came up with two figures: One worth $1.8 trillion and the other $1.2 trillion. Her fellow adviser, Larry Summers, described these figures as ‘non planetary’ – he believed they would never be taken seriously so suggested she pick a smaller number.   She eventually suggested a much smaller $787 billion package which was passed. So why was a $1.2 trillion package ‘non planetary’ during the GFC but not for COVID-19?  Our political and economic environment is unrecognisable compared to just a few months ago We’re seeing highlyconservative governments step away from their philosophies to support workers and smaller business. So what’s different about this crisis that’s causing this upheaval?  In the GFC, people lost confidence in the market. The actual resources hadn’t diminished at all. Everyone could still work – it was just that there were suddenly no jobs. Businesses were afraid to hire because they didn’t have enough customers. Customers were too afraid to spend. It could be solved by incentivising spending.  Fast forward to 2020 and this crisis is very different. This time, the resources have actually diminished. Workers in hospitality and retail are physically barred from working. This time, it’s not as simple as restoring confidence in the market. It’s about ensuring people have the means to survive while they can’t go to work for an indefinite period of time. That requires a lot more government intervention.  The biggest problem for many stimulus measures around the world, but especially in the US, is that they’re too focused on the short-term, one-off payments that don’t provide ongoing support.  How will the system recover? Many economists expect the economy will only recover once the virus hits its peak. As we haven’t reached that point yet, and we don’t know when we will, it’s too early to know how we’ll recover from the COVID-19 recession. UBS forecast a strong ‘V’ shaped recovery based on the assumption the virus would peak faster than expected in Q2. They forecast growth to hit 4.5% by 2021, the fastest rate since 2010.  Conversely, a U-shape recovery is fairly typical of the supply-chain shock we’re experiencing. In this case, the virus would reach its peak in July. You could expect a mid-2020 collapse of -20 to -30% and contracted growth in most countries. But this would be followed by a recovery of losses 2021.  According to Christopher Joye from Coolibah Capital Investments, the global economy could recover in a ‘VU’ shape. The ‘V’ will be a quick growth spurt once supply chains fire back up and employees go back to work. This will be followed by a slower growth phase in the shape of a U as the economy rewires itself and pays for the stimulus packages through taxes.  We have some challenging times ahead. The world will emerge looking very different. Whether the rebound happens mid-year or sometime in 2021, we don’t know.    Sources:

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