A collapsing Chinese economy puts the acid on stimulus-shy government to respond

After spending the last decade deriding Labor’s response to the financial crisis as inept, over the top and wasteful, the Coalition now finds itself facing a similar challenge after a weekend in which an already poor economic outlook dramatically worsened.

As this week’s national accounts for the December quarter will show, the Australian economy was already stumbling badly at the end of 2019, with neither households nor business spending, and major sectors like construction and manufacturing contracting.

But it is the impact on China of the coronavirus crisis that is likely to push the Australian economy into negative growth this quarter and, quite possibly, a recession.

On Saturday, the first of two monthly surveys of Chinese manufacturing from the National Bureau of Statistics showed a record plunge in activity in China to a record low of 35.7, from a January reading of 50 — the dividing line between expansion and contraction. The market had been looking at a reading of 46.

Output plunged to a reading of just 27.8 v 51.3 in January, new orders slumped to 29.3 v 51.4 and new export orders (28.7 v 48.7) also collapsed. Buying levels plummeted (29.3 v 51.6) and employment contracted as well (31.8 v 47.5).

Economists now say March quarter GDP growth in China slowed from the 6.1% rate in late 2019 to as low as 2% — or even went negative.

Here, after last week’s terrible construction and investment figures for late 2019, today’s Performance of Manufacturing Index from the Australian Industry Group showed a fourth straight month of contraction for that sector in February.

We know that two other major sectors — tourism and higher education — will be severely hit by the virus, on top of the impacts of the bushfires.

Scott Morrison keeps insisting that this is a health crisis rather than a financial crisis. And the government has handled the health dimensions of the crisis very well — for an economy so tightly connected to China, we have had remarkably few cases of the virus.

But in some ways this is potentially worse than a financial crisis: it will not merely damage confidence, reduce spending and curb investment, but damage supply chains and affect the supply of goods and services.

The Australian economy is deeply dependent on a free-flowing international trade system, and that system is threatened both by the dramatic slowing of manufacturing in its major trading partner and by the closing of borders to prevent the spread of the virus.

The Rudd-Swan government, faced with a financial crisis roiling the global economy, took Ken Henry’s advice to “go hard, go early, go households” (oh to have a Treasury as trusted and non-partisan as the one we had a decade ago).

The Morrison-Frydenberg government, so far, is refusing to do any of those. Morrison says any response will be “modest”. He is refusing to do anything quickly — indeed he has rejected a full year of calls by the Reserve Bank and business for more fiscal stimulus. And it seems any response will be aimed at individual industries, rather than households.

One of the most effective aspects of the Rudd government’s programs was the restoration of consumer confidence. Handouts to households, a strong response to shore up the banking system and good communication gave voters the sense that someone was in charge, was committed to a plan, and wanted them to keep spending.

They responded in kind and kept the economy afloat while medium-term measures like the school halls and social housing components of the stimulus kicked in.

The Morrison government, already in bad odour with much of the electorate, risks failing to elicit the same kind of response from consumers if its stimulus measures are half-hearted and too skewed toward particular sectors. Its last effort at a one-off stimulus measures, the post-election tax offsets, actually led to a fall in retail spending because of a lack of consumer confidence.

Not that the government is short of options for spending.

There is virtually no one left in the country outside the government that opposes an increase in Newstart, which would directly flow into the beleaguered retail sector.

A depreciation allowance, which the government has been mulling stealing from Labor for months, would also be universally welcomed. There’s a growing call for the 2022 tax cuts to be brought forward.

Increased infrastructure spending is less likely to be effective, given the necessary time lags and the fact that, due to major projects in Sydney and Melbourne, parts of the heavy engineering sector are already at capacity.

Nor is there any reason for further delay. Last year, Scott Morrison brought the budget forward by a month simply to suit his own election purposes. He could surely bring the budget forward again this year to give households and businesses some certainty and confidence that the government has a plan for the economy.

If it’s good enough for Morrison’s political self-interest, it’s surely good enough for national economic interest.

Ultimately, though, this is a test of the Coalition’s ideology of government. Not about the size of government — the Coalition is by far the biggest-taxing side of politics and has presided over high levels of public spending, funded by deficits, in recent years. What the Coalition struggles with is governments that do things — that spend on major infrastructure projects like the NBN, or intervene to prop up demand with stimulus packages, or target education funding where it’s needed.

For a decade the Coalition has insisted the Rudd-Swan government got it all wrong when it saved the Australian economy in 2009. Well, now it has to show how it would have done it. And the stakes are very high if it messes it up.