World awash with new stimulus but will it be enough?

An almost forgotten aspect of the world-wide Government response to the coronavirus is that the entire globe is now preparing for the biggest economic stimulus payments since the Global Financial Crisis.

Here in Australia, Prime Minister Scott Morrison this week outlined a $17.6 billion stimulus package that in reality could end up costing a lot more than that over time.

And in the world’s biggest economy, the United States, while President Trump has so far been slow in providing details of his planned stimulus measures, they should arrive soon.

Central banks cutting rates and pumping cash

In the meantime, the US Federal Reserve is already reacting to the rapid stock market crash by pumping massive amounts of liquidity through the bond market.

The US Fed and the Chinese People’s Bank are both widely expected to cut interest rates further in the next week and the Australian Reserve Bank is also expected to cut further, following on from an emergency cut by the Bank of England.

Europe did not cut their already negative rates but the EU has just announced a stimulus package which will add strong support to bank lending and will expand its asset purchase program by a further $212 billion.

European banks can now borrow money from the European Central Bank at -0.75% and loan that money back out to businesses at a higher rate – effectively enjoying a central bank mandated carry trade that could be quite profitable for the banks and powerful for the economy.

ScoMo hits stimulus button hard

Looking at the Australian government response in more detail, the measures will give the Australian economy a good chance of recording economic growth in the June quarter of 2020.

There is also scope to add to the stimulus and scale it up in the May Budget should it appear to be short of delivering the necessary positive growth in the face of the coronavirus effects.

All told the stimulus package is equal to around 0.9% of annual GDP, which should have quite a powerful effect because most of the payments will be made in the June quarter.

One of the more effective but hopefully better targeted lessons taken from the Rudd stimulus measures is that much of the money will be directed to poorer households which are much more likely to spend the cash in the economy instead of adding it to savings.

Payments to be made before middle of 2021

It will be a relatively short-term sugar hit, with all of the stimulus to be spent or distributed by the middle of 2021.

A range of welfare recipients including those on Newstart, pensions and family tax benefits and some others will get a household support payment of up to $750.

While some pensioners may decide to save some of that, those on other government payments are likely to spend the lot because it will be a very rare lump sum windfall.

These payments are designed to boost demand for household items and should keep the tills ticking over at a host of businesses.

Business being helped as well

On the other side of the equation there are a range of measures to help business cashflow.

A $25,000 income tax write-off for businesses with turnover of less than $50 million is effectively a cash payment for all small and medium businesses who employ staff while a wage subsidy for apprentices should give businesses an incentive for businesses to keep on their younger workers.

An extension of the instant asset write-off will underpin investment and provide further cashflow benefits for business with turnovers up to $500 million.

Casual workers who could be at risk of losing their income during quarantine periods should be able to benefit from a waiving of the waiting period for the sickness allowance.

While on one level the payments might seem like a very big spend in a hurry, the alternative of going into an instant recession is probably less palatable for governments of all persuasions.

Cash splash could be net positive if recession avoided

If the stimulus payments can keep the economy ticking along even at a low rate, the Federal Government and the States will benefit from increased tax revenue that will in part offset the spending.

Recessions tend to cause a lot of unemployment which squeezes the budget in two ways – more spending through social welfare payments and also less income from tax payments.

While Scott Morrison’s government has always derided the Rudd Government’s “cash splash’’ after the GFC, it is uncanny how similar this package is in many details, including being of a similar scale if you take into account inflation and economic growth.

Going hard early straight out of Rudd playbook

Going hard, going early and targeting consumers are all features that have come straight out of the Rudd playbook.

Hopefully the lessons of the Rudd payments – which tended to keep going long after they were no longer needed and were sometimes misdirected – have been learned but with stimulus payments the real task is to get the money out and spent as quickly as possible rather than worrying about having every detail correct.

Globally, the question around all of the stimulus in the form of government spending and central bank rate cuts is will it be enough to overcome the negative effects of the coronavirus?

That is the multibillion-dollar question and it is probably one that we will only be able to answer after the worst of the coronavirus is behind us.