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Cool heads will prevail in crisis

Opinion Piece

Date : 08 March 2020

Author: The Hon Josh Frydenberg MP

Publication: The Australian

Facts, not fear, must determine our response to the coronavirus.

With more than 104,000 global cases across 94 countries, we are in the midst of a pandemic.

To date, there have been more than 3500 deaths, more than 3000 of which have been in China.

This is a higher transmission rate, but lower mortality rate, than SARS.

Understandably, there is some anxiety in our community as a vaccine is still being developed and the virus continues to spread.

Seeing footage over the weekend of people involved in a supermarket scuffle over access to items was disturbing. Now is the time for Australians to be calm and look after one another, reassured by the fact that the government is putting the safety of citizens first.

We moved ahead of other nations and put travel restrictions in place; we worked with the airlines to assist the safe passage of Australians out of Wuhan; and we are working closely with the Chief Medical Officers at the Commonwealth, state and territory levels to increase our health preparedness.

There is also an economic response being undertaken, both globally and domestically.

Before the coronavirus, the world’s economy was picking up with Brexit confirmed and the phase one trade deal between China and the US giving people confidence of a stronger year ahead.

However, since then we have seen a significant impact on key sectors, such as tourism, education, agriculture and manufacturing.

As two-thirds of the world’s economies have China in their top three trading partners and Chinese factories are closed for a substantial period, end-to-end supply chains have been disrupted.

For example, in Australia we import from China more than 60 per cent of our computers and telecom equipment as well as steel and aluminium structures necessary for the construction industry.

In China, the Purchasing Managers Index, which is a proxy for manufacturing activity, fell from 50 points in January to 35.7 points in February. This is more than three points lower than what it was at the height of the GFC.

We are also seeing significant volatility in global debt and equity markets. However, unlike during the GFC, global financial markets remain liquid and open and the banking system is well capitalised to respond to the crisis.

At home, the detrimental economic impact of the coronavirus follows a challenging summer of bushfires and extended drought. Treasury has estimated the coronavirus will detract at least 0.5 percentge points from economic growth in the March quarter, with the predominant effects being seen in our education and tourism sectors.

In comparison with the 2018-19 year, we are expecting 650,000 fewer short-term visitors in the March quarter, and 90,000 fewer international students taking up their first semester.

Given that in the past year, Chinese students and tourists contributed more than $16bn to the Australian economy, this impact is being keenly felt, not to mention the decreased demand for some of our agricultural and seafood produce such as crayfish, which are usually in high demand around Chinese New Year.

With some Australians cancelling their trips overseas and preferring to holiday at home, there is some offset to the fewer inbound tourists, but it is only partial.

In response to the coronavirus, the RBA has moved to reduce the cash rate to 0.5 per cent, and the big banks have passed on this rate cut in full.

The Prime Minister has foreshadowed the government will soon be releasing its economic response, building on announcements to date, including going 50/50 with the states on additional health costs arising from the spread of the virus.

Our fiscal measures are designed to keep businesses in business and Australians in jobs, recognising that this health crisis is creating both supply and demand constraints across the economy.

Impacted businesses are seeing their cashflow under pressure and some Australians may be anxious about their job security. Our focus in not only on ensuring we get through this health crisis, but that we are strong economically on the other side.

As economist Chris Richardson has observed, monetary and fiscal policy are working together to support economic growth. In announcing our response, we are being careful not to repeat the mistakes of previous stimulus programs, nor undermine the structural integrity of our budget.

Australia is approaching this economic challenge from a position of strength, with the most recent National Accounts indicating that growth picked up from 1.8 per cent in September to 2.2 per cent through the year in December.

In the words of the Treasury secretary, Dr Steven Kennedy, “the economy is actually quite solid and travelling quite well”, making us “well placed” to manage this shock. So too, Reserve Bank governor Phil Lowe has pointed to Australia’s “very strong” economic fundamentals and the fact that the economy was reaching a “gentle turning point” last year.

The IMF and the OECD are both forecasting Australia to grow faster than comparable countries including Britain, Canada, Japan and France, and the OECD has singled out Australia with Germany as two countries that have the fiscal flexibility to respond to the coronavirus without endangering debt sustainability.

This is where our considered economic management and budget discipline displayed over the past six years is going to serve Australia well. We have delivered the first balanced budget in 11 years, we have employment growth almost twice the OECD average, and household disposable income was on the rise in the back half of last year following the biggest tax cuts in two decades.

Australians can be calm and confident that their government is doing everything possible to ensure their safety and the economy remains strong.

Josh Frydenberg is the federal Treasurer.

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