Economics

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EXPERT OBSERVER 

The Reserve Bank Board’s minutes for its December meeting emphasised that the Board is committed to substantial policy support for a considerable period.

The Minutes note that “Substantial policy support would therefore be required for a considerable period”.

Despite recent encouraging economic developments around the distribution of vaccines in both the US and UK and what the minutes refer to as “the recovery in the labour market was more advanced than expected” there remains significant caution with respect to the Board’s confidence in the recovery –“the unemployment rate had ticked up in recent months and broader measures of labour underutilisation remained high” – “there was still a significant amount of spare capacity in the labour market and this would remain a key policy challenge for some time”.

Overall, the sentiment from the Board is broadly unchanged, “the recovery was still expected to be uneven and protracted”.

A second outstanding theme in the minutes is the view on the housing market. The domestic housing market was described as “improving but uneven” and it was pointed out that “national housing prices had increased only a little since the outbreak of the pandemic”.

The decline in overseas migration had impacted the rental housing market with rents falling and “rental vacancy rates in inner city Sydney and Melbourne around their highest levels in many years”. There is some speculation that the authorities may see the need to slow the housing market in 2021 with some form of macro prudential policies.

Our view is that these record low rates will eventually move house prices to levels that will concern the authorities (particularly if confidence returns and the significant lift in new lending is not offset by rising repayments resulting in elevated levels of household debt) but that will be a story for 2023.

Conclusion

Yesterday we released our forecasts for the RBA’s approach to Quantitative Easing.

We expect that the current $100 billion program will be extended into a second $100 billion program before being reduced to two consecutive $50 billion programs that will see the policy covering both 2021 and 2022.

In fact, this coverage will fall a little short of the end 2022 date.

The current program which began on November 5 is described by the RBA as “approximately six months” would expire in late April/early May 2021.

We expect that will be immediately replaced by a second program of equal size and length taking the program to late October/early November 2021.

That program is expected to be replaced by a smaller, $50 billion, program of “approximately six months” to Late April/early May 2022; and finally, a fourth program to late October/early November 2022.

Two years of QE is unlikely to be currently priced into the curve but the approach set out in the December Minutes – “substantial policy support; considerable period”; “protracted recovery” all indicate that the RBA is certainly contemplating further QE.

In particular we are likely to hear more early in the new year as indicated by the Minutes, “Members agreed to keep the size of the bond purchase program under review”.
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Yesterday we forecast that the RBA Board would extend the current $100 billion QE program with a second $100 billion program (start date corrected to early May from June, 2021). The December Minutes give clear support for this view

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RBA Minutes support Westpac's QE views: Bill Evans

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For some years now Modern Monetary Theory (MMT) has been gaining prominence as a solution to the perceived failure of traditional economic policies to achieve full employment and meet inflation targets, despite at or near zero interest rates.
MMT basically advocates using printed money from the central bank to directly finance government to spending, which boosts the economy. This concept is not new.
However, it has been given added impetus by the hit to economic activity from coronavirus. And with even Reserve Bank of Australia Governor Philip Lowe referring to it in question time after an address last week.
But can it help or is it just another fad like monetary targeting?
MMT does provide some useful insights or reminders
The experience over the last decade has highlighted the already well-known failings of the quantity theory of money.
Put simply there are different forms of money and its speed of circulation in the economy (or V) is not constant.
For example, quantitative easing (QE) led to an increase in the money supply in Europe, the US and Japan last decade but it was narrow money (like cash and bank reserves) not credit and the circulation of money through the economy slowed so there was not much, if any, increase in inflation.
MMT reminds us that, as long as there is spare capacity in the economy, using printed money to finance public spending should not be inflationary.
This is consistent with the experience of last decade which was characterised by spare capacity globally and taken together with a fall in the velocity of circulation of money in the economy explains why inflation did not take off despite QE boosting the money supply.
After all, using government spending to employ unemployed workers also has merit. In fact, it’s standard Keynesian economics.
But what are the problems with MMT?
While MMT provides some useful insights it has big problems:
First, it gives the impression there is always some sort of free lunch. That the central bank can just print money – like some sort of Magic Money Tree – and all economic problems can be solved. But as an old friend of mine used to repeatedly remind me, “you can’t make something out of nothing.” Of course, in the current environment of high unemployment and inflation below target, there perhaps is a bit of a free lunch if more government spending financed by money printing can result in full employment and boost inflation back to target.
But contrary to what some MMT supporters imply, the economy is not always in a position of spare capacity.
Second, the traditional concern about budget deficits and rising public debt is not always overblown. When the economy is strong, it can cause overheating as the competition for workers and funding can push up wages, prices and interest rates “crowding out” more productive private sector activity. Budget deficits and high public debt are not a problem now as there is spare capacity, economies are not overheating and interest rates are low but this won’t always be the case.
Third, MMT underestimates the costs and low productivity associated with large scale public employment programs. This has been evident in the failure of “work for the dole” schemes in Australia to make much headway. The more fundamental problem with MMT is that governments may have trouble turning off the monetary and fiscal stimulus when spare capacity is used up and inflation hots up.
Not only is it hard to get the timing right economically, but it’s compounded by politicians in government having an incentive to keep the stimulus going to get re-elected. Politicians risk becoming addicted to the flow of money from the central bank’s Magic Money Tree, resulting in wasteful government spending and eventually high inflation or hyperinflation.
And once the inflation genie gets out of the bottle, it’s hard to get it back in as we saw in the 1970s.
This is precisely why central banks are independent of politicians.
For now, spare capacity is massive which is keeping inflation is below target and so there is plenty of room for big budget deficits and this may remain the case for a while – so interest rates could remain low for several years.
But the combination of massive quantitative easing and fiscal spending along with increasing talk of MMT highlights that policy makers are increasingly focussed on taking more risks with inflation.
Ultimately the combination of ultra-easy monetary policy, huge budget deficits and a retreat from globalisation will add to the risk of an eventual pick-up in inflation - but at this stage this looks like something to be wary of on a five to ten-year horizon, but not right now. 
SHANE OLIVER | Head of Investment Strategy and Chief Economist | AMP Capital
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Policy-makers focussed on taking more risks with inflation: Shane Oliver

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Expert Observation by Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital
Introduction
This economic and fiscal update is the first since December’s Mid-Year Economic and Fiscal Outlook when budget surpluses looked just around the corner. Since then things have changed dramatically due to the hit from coronavirus and necessary support measures from the Government.
Policy stimulus
The statement provided no new policy stimulus measures beyond those that have been announced in the last two weeks:
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$2bn in spending on subsidies for apprentices &amp; JobTrainer;
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<li>An estimated $16bn to extend JobKeeper to March next year but with payments stepping down to $1200 and then $1000 a fortnight for those who worked 20 hours or more per week in February and to $750 and then $650 for others and businesses having to meet the turnover reduction test at the end of the September and December quarters to keep receiving it; and</li>
<li>An estimated $3.8bn to extend the JobSeeker Supplement to December at the pared back rate of $250 a fortnight.</li>
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This additional $22bn in spending along with prior coronavirus- related economic support (in the form of actual spending, tax breaks and health measures) takes the COVID-19 response package to nearly $174bn. JobKeeper is the main element in this, but it also includes the JobSeeker supplement, payments to businesses and payments to eligible households. There is also loans &amp; guarantee support (from the government and RBA) worth $125bn or just over 6% of GDP.
Proposals to bring forward the tax cuts and provide additional investment incentives look to have been pushed out to the October budget and additional industry support packages are also likely. The Government may have delayed this extra stimulus to gauge how much additional help will be required with a lot riding on how quickly the latest outbreak of coronavirus is brought back under control. Spreading out the announcement of new stimulus measures may also get more bang for the buck in terms of the boost to confidence. 
Economic assumptions 
The Government is forecasting the economy to contract this financial year by -2.5 per cent, its biggest financial year contraction since 1946-47. But this masks a "record" -7 per cent contraction in June quarter GDP and a gradual recovery from the second half of this year. The Government is a bit more optimistic than we are in terms of economic growth and unemployment. 
<img src="https://www.urban.com.au/images/2020/7/24/27_Economic%20Assumptions.png" alt="">
Budget deficit projections 
The Government's revised budget projections and our own are shown below. These should be treated with greater than normal caution given the uncertain economic outlook. 
<img src="https://www.urban.com.au/images/2020/7/24/27_Budgets.png" alt="">
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The hit to the economy and hence revenue and expenditure since the Mid-Year Economic and Fiscal Outlook last December is huge at $72bn for this financial year and is shown in the line called “parameter changes”. It should gradually start to diminish as the economy recovers. Policy stimulus (mainly due to the coronavirus response but also other things) since last December is shown in the line labelled “Total stimulus”.
As a result of the Government’s fiscal response and the hit to revenue from the economic downturn, the Government projects the budget deficit to further blow out from around $86bn for the past financial year to a record $184.5bn this financial year.
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While it does not provide projections beyond this financial year the implication is that the deficit will decline in future years as support programs phase down and the economy recovers. On the Government’s projections this would see the budget deficit as a share of GDP peak at around 9.7% of GDP in 2020-21, which would be its highest since World War 2. We continue to see a bigger deficit for this financial year of around $220bn reflecting both a bigger hit to revenue and additional stimulus of around $17bn to be announced in the months ahead, including in the October budget. This is likely to include the bring forward of the 2022 tax cuts, more investment incentives and more industry support programs. The budget deficit blow-out will add about 20 per cent of GDP to public debt out to 2022. 
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/7/24/27_Deficit%20.jpg" alt="">
Assessment
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The additional $22bn in stimulus announced over the last two weeks is welcome and will help turn the fiscal cliff in October into a fiscal slope. The boost to stimulus announced in the last two weeks takes Australia’s total level of coronavirus related fiscal stimulus (excluding loans and guarantees) this year up to 8.7% of GDP, which is well and truly at the high end of comparable countries. This should aid the economic recovery.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/7/24/27_4.jpg" alt="">
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However, it’s doubtful that this will be enough given the long tail of unemployment flowing from the coronavirus shock. We estimate that were it not for JobKeeper and people leaving the workforce the effective unemployment rate would currently be 11.3%, which is well above the official measured rate of 7.4%. This has fallen from 14.8% in April thanks to the reopening of the economy, but with the threat to the recovery posed by the second wave of cases in Victoria and the lockdown in Melbourne and the risk of a flow on to NSW, effective unemployment may only fall to around 10% or so by September and maybe 9% or more going into next year, so continued income support is essential. The Government’s focus now shifts to economic reforms in the October budget and this is likely to include even more fiscal support, as noted earlier.
Our assessment remains that the blow out in the budget deficit is affordable. First, it’s absolutely necessary as were it not for the support measures the economic hit would be far greater.
Second, it makes sense for the public sector to borrow from households and businesses at a time when they have cut their spending, and to give the borrowed funds to help those businesses and individuals that need help.
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Third, the support programs are targeted at current needs so shouldn’t lead to permanently higher government spending.
Fourth, Australia’s starting point for net public debt last year was low at 23% of GDP compared with other advanced countries averaging 83%. See the next chart. And even with projected budget deficits it will remain relatively small.
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/7/24/27_5.jpg" alt="">
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Fifth, borrowing to finance the budget deficit is in Australian dollars and we are not dependent on foreign creditors, so we are not vulnerable to a “foreign currency crisis.”
Finally, the cost of Government borrowing is very low at around 0.85% for ten years and 0.25% for three years.
Implications for the RBA
Ongoing Government support for households and businesses is not enough to change our assessment that the RBA will need to keep cash rate near zero for years ahead and possibly need to undertake more quantitative easing in the face of ongoing spare capacity in the economy and below target inflation.
Implications for Australian assets
Cash and term deposits – with the cash rate unlikely to rise from 0.25% for years, returns from cash and bank term deposits will remain low for a long time to come. That said the budget stimulus and increase in money supply holds out at the prospect that at some point inflation and interest rates will rise. But it’s probably at least three years away.
Bonds – the surge in public debt and bond supply would all other things being equal, point to higher bond yields, but this is offset by massive spare capacity, low private sector borrowing, very low inflation and the cash rate capped at 0.25% for years it’s hard to see a lot of upside in bonds yields. That said, if coronavirus comes under control it’s hard to see a lot of downside either so medium-term bond returns are likely to be low.
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Shares – the addition of extra policy stimulus further helps to offset the hit from coronavirus and adds to confidence that growth will recover which is supportive of shares.
Property – ongoing income support is continuing to help the property market avoid a sharp fall in home prices but the negatives around high effective unemployment, the weak rental market and the collapse in immigration point to ongoing falls in prices into next year, particularly in Sydney and Melbourne.
The $A – ongoing fiscal stimulus at the high end of comparable countries coming at a time of rising commodity prices and a declining US dollar point to more upside for the $A.
Concluding comment
With private sector spending hit by coronavirus it makes sense for the Government to continue to help fill the breach and support the economy. The best approach to getting debt back down is to grow the economy aided by a reinvigorated economic reform agenda, but for a while yet government fiscal support will continue to be needed.
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Australian economic and fiscal update – record budget deficits, but more to come

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The Carbon Risk Real Estate Monitor (CRREM) has announced the public release of decarbonisation pathways for the global real estate sector, and the finalisation of the tool to identify and manage transition risks for individual assets.
The pathways will reportedly help market participants meet the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
The downscaling pathways published today on the CRREM website identify annual energy- and carbon-intensity trajectories until 2050 across real estate markets and sectors that are consistent with keeping global warming below 2 degrees Celsius.
This is a policy goal endorsed by most municipal and national governments and thereby constitutes a plausible scenario against which future climate-related transition risk can be assessed.
The major investors supporting CRREM aim to establish it as a global standard for developing long-term decarbonisation pathways in the real estate sector based on a transparent and scientifically rigorous methodology.
CRREM covers 28 countries in Europe, North America and Asia-Pacific across the commercial real estate sector, including retail, offices, and logistics, as well as the residential sector.
According to the organisation, real estate plays a major role in combatting climate change.
The construction and operation of buildings accounts for 39 percent of energy-related greenhouse gas emissions globally, and much higher percentages in densely populated urban centres.
This exposes the real estate sector to significant climate-related transition risk as governments have started to impose increasingly stringent regulations on energy use and emissions from buildings to meet their own climate goals.
Regulatory risk around energy and carbon is shaping market and technology trends in the real estate sector.
As temperature is projected to rise 3.8 degrees Celsius under current legislation, the decarbonisation pathways aligned with 1.5- and 2-degree global carbon budgets reflect significant reduction requirements beyond current legislative requirements.
CRREM estimates that the carbon-intensity of the building sector will globally have to decline from currently approx. 52 kgCO2e/m2/pa to below 10 kgCO2e/m2/pa by 2050 in order to be in line with the 2-degree global carbon budget.
Such a scenario would have significant implications for long-term asset planning and risk management in the sector – especially for developed countries which in some cases are facing 100 kgCO2e/m2/pa as a starting point for office buildings (based on a whole-building approach).
Calculation of the global reduction targets and the derived national targets for different asset classes in the real estate sector create added-value for investors.
Added value for example includes the transparent analysis of carbon risks, calculation of the abatement costs and analysing the correct timing of retrofit measures that are needed to minimize climate-related transition risk.
Along with the pathways, CRREM also finalized the development of a tool to manage stranding risk for individual buildings.
All information required is aligned with the information GRESB collects at the asset level in order to assess and benchmark the performance of real asset portfolios. The software is Excel-based and has undergone a significant testing phase. It is available on the crrem.eu website.
The decarbonisation pathways were developed by the Austria-based Institute for Real Estate Economics (IIÖ), with technical support from GRESB.
The initiative was funded by APG, PGGM and Norges Bank Investment Management (NBIM) and received further support from Japan’s Government Pension Investment Fund and Ivanhoé Cambridge.
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Carbon Risk Real Estate Monitor announces decarbonisation plan

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EXPERT OBSERVATION 
There is no shortage of repugnant and dangerous ideas in the world. An age old question is whether free speech will see good ideas win out over bad.
The proposition that good ideas eventually triumph in “the marketplace for ideas” dates at least to 1644, when John Milton wrote in his anti-censorship tract Areopagitica:
Let [Truth] and Falsehood grapple; who ever knew Truth put to the worse, in a free and open encounter?
But it was perhaps first explicitly stated by United States Supreme Court Justice Oliver Wendell Holmes in 1919, in his dissent to a 7–2 ruling in the Abrams v United States case involving the first amendment right to freedom of speech.
Holmes wrote:
the ultimate good desired is better reached by free trade in ideas – that the best test of truth is the power of the thought to get itself accepted in the competition of the market.
Old though this question may be, it is one that confronts us time and again. Is it more dangerous to stifle expression of a seemingly dangerous idea, or to let it be freely expressed?
It is central to the controversy over the New York Times publishing on June 3 an idea many found repugnant.
That idea was “an overwhelming show of force to disperse, detain and ultimately deter lawbreakers” as a response to widespread Black Lives Matter demonstrations and isolated outbreaks of violence and looting.
It was advocated in an op-ed piece by a US senator from Arkansas, Tom Cotton.
Editorial page editor James Bennet resigned as part of the paper’s mea culpa. A champion of the “marketplace of ideas” might argue the New York Times did the right thing, or at least nothing wrong.
So what would an economist, whose job is to understand market behaviour, say?
Economists and markets
The most celebrated result in all of economics – the “First Welfare Theorem” formalised by Nobel laureates Kenneth Arrow and Gerard Debreu – states that with the right conditions competitive markets will allocate resources with maximum efficiency.
Yet economists – especially and including Arrow and Debreu – are all too aware that markets don’t always function well in reality. Information is often “asymmetric”, such as a seller knowing more about a product’s quality than the buyer. There are “externalities”, costs incurred by third parties, such as environmental harms not factored into market prices. Plenty of markets are not sufficiently competitive.
The failure of markets for insurance, used cars and many other things has been well-documented.
Why, then, why should we have faith in the marketplace for ideas?
Ideas are not products
Over the past two decades economists have been developing formal models that can speak to competition in ideas.
The stepping-off point is to note the nature of competition in an ideas market is fundamentally different from competition in a product market.
With products, sellers compete for customers by setting the price for their products. As the economists Matthew Gentzkow and Jesse Shapiro put it:
Two firms compete [in the product market] if their products are substitutes from the perspective of consumers. A change in the price of one affects the purchasing behaviour of the other’s customers. This kind of competition is important because it limits firms’ ability to raise price above marginal cost.
Ideas differ in the following way:
Two firms compete in [an information market] if 1) they cover the same events and 2) at least some consumers will learn the facts reported by both. A change in the set of facts one reports affects the information of the other’s customers. This kind of competition limits firms’ ability to control consumers’ beliefs.
A form of prisoner’s dilemma
The cleanest formal model of competition between parties trying to control people’s beliefs comes from a 2017 paper by Matthew Gentzkow and Emir Kamenica (a former classmate and University of Chicago colleague of mine).
The “marketplace for ideas” notion holds that when there are more senders of information, more information will be communicated to consumers.
Gentzkow and Kamenica showed this is not necessarily so. It all depends on the nature of the strategic interaction between the senders of information.
Senders might be caught in a kind of Prisoner’s Dilemma, the game theory concept made famous by the movie A Beautiful Mind. It would be socially productive for more information to be revealed, but the private incentives of the senders lead to less revelation.
For example, consider two pharmaceuticals makers with drugs only they know the effectiveness of. One half of their market is customers who will only buy pharmaceuticals they believe likely to work well. The other half wants their drugs to work too, but they’ll also buy if it might only partially work.
In this case each maker has an incentive to withhold information about the efficacy of their product, even though they and the consumers would be better off if they and the rival revealed more information. It’s just like the consequences of unilateral action as shown in A Beautiful Mind.
If strategic interaction in the marketplace for ideas takes this form then competition does not lead to good arguments winning out.
Gentzkow and Kamenica show the crucial condition for competition to lead to more information being revealed is this: each sender must be able to unilaterally deviate to some outcome more informative for consumers. In the drug example, this would be each maker disclosing the efficacy of their own drug and that of their competitor.
Whether this happens in practice depends on important details about the nature of the ideas being discussed, what types of information are permissible by law, and of course whether those receiving information are rational.
In short, the answer to whether the marketplace for ideas leads good ideas to win out is: it depends.
Open discussion is not enough
Just because the marketplace for ideas doesn’t always work doesn’t mean it never works. There are deeply important non-economic reasons to value freedom of speech that extend beyond how much information gets revealed.
But modern economics teaches us that competition in the marketplace for ideas is different than competition in the market for ordinary goods and services. We should not always conclude that odious ideas will be consigned to the dustbin of history simply through open discussion.
Richard Holden is a Professor of Economics at UNSW
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Why ‘the marketplace for ideas’ can fail – from an economist’s perspective: Richard Holden

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EXPERT OBSERVATION
A housing boom that lasted from the mid-1980s with only minor interruptions has added to rising income inequality in Australia. Yet an impending housing market bust, triggered by the coronavirus pandemic and the resulting spike in unemployment, will not restore greater equality. On the contrary, recent history shows housing busts can worsen inequality.
Those who benefit most from a boom are not those who pay the price when it busts. And those harmed by the boom often become even more vulnerable during the bust.
Our analysis highlights the risks for people who bought their first home at the peak of the boom. We estimate 24,000 households are at very high risk because they took out large loans that might soon exceed their home value and also work in sectors with high job losses. Another 135,200 are at high risk and 121,000 are at moderate risk.
Coronavirus has set up a housing bust
Experts have long cited an upsurge in unemployment as the main threat to house price growth. This risk became reality with the coronavirus pandemic. Over the seven weeks from mid-March to early May, jobs fell by 7.3%.
Unless employment rapidly recovers, the housing market is facing a major downturn. In one worst-case scenario released by the Commonwealth Bank, house prices could fall by up to 32%  over the next two years.
Recent first-time buyers are most vulnerable
Households that can hold on to their homes and weather the storm until the market recovers are not substantially harmed. Established owners, who bought their homes before or early in the boom years, have enjoyed the largest increase in their home values, and the largest reductions in their debt. This puts them in a position of relative resilience to a housing market bust.
In contrast, evidence from the 2008 housing crisis in the United States shows which households are most at risk. These were households that bought their first home with no deposit, or a very low one, in the period leading up to the 2008 crash. The crash left these households “underwater”, trapped with an asset worth less than their mortgage debt. Many defaulted on their mortgages, fuelling the housing market’s downward spiral.
The Australian housing market and financial institutions differ from those in the United States in 2008 in fundamental ways. Still, Australian households that bought their houses at the peak of the boom and have now lost their jobs in the coronavirus pandemic are facing the highest risk.
These include 24,000 recent (2014-5 to 2017-18) first home buyers who borrowed over 80% of the value of their home and were employed in industries where jobs have now collapsed. Another 135,200 recent first home buyers with high loan-to-valuation ratios are also at risk of going “underwater”, with homes worth less than their debt. Many of them are also in precarious employment, irrespective of the pandemic. (These figures do not include first home buyers in 2018-19, for which data are not yet available.)
Renters’ relief could be short-lived
Many private renters hope a housing downturn will translate into lower rents and perhaps give them a chance to buy their first home in a more affordable market. However, this is not always the case in a downturn. In the US from 2007 to 2009, despite declining house prices, rental affordability stress has only increased.
In Australia, the sudden decline in international students and short-term rentals has increased long-term rental vacancies in some areas. Reports suggest rents are going down, especially at the upper end of some rental markets.
However, in the longer run, the slowdown in housing construction will create supply shortages, leaving rental vacancies low and rents high. Many landlords, mostly “mum and dad” investors, have taken large loans to finance their property investment. They will need to keep rents high to hold on to their investment properties.
Lower house prices will enable some households to become home owners for the first time, after being locked out of the market during the boom years. These households could benefit from a coronavirus housing bust if the market then recovers. Even so, their gains will do little to change the overall trend of rising inequality made worse by the housing downturn.
We need to flatten out booms and busts
Improved housing affordability is necessary to reduce social and economic inequality. A housing downturn will reduce house prices. But this downturn, when coupled with rising unemployment, will not deliver greater equality, especially if it’s followed by yet another boom.
Australia has flattened the curve of COVID-19 infections. To be successful in reducing inequality, we need to flatten the curve of both booms and busts in the housing market cycle. And only a thorough overhaul of national housing policy will achieve that.
Ilan Wiesel is a Senior Lecturer in Urban Geography at the University of Melbourne
Liss Ralston is an Urban Statistician at the Centre for Urban Transitions - Swinburne University of Technology
Wendy Stone is an Associate Professor at the Centre for Urban Transitions, and the Director of the Australian Housing and Urban Research Institute at the Swinburne University of Technology
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Housing boom propelled inequality, but coronavirus bust will skyrocket it

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GUEST OBSERVER
I just published a book, <a href="https://mitpress.mit.edu/books/economics-age-covid-19">Economics in the Age of COVID-19</a>.
It was written over the last month or so, peer-reviewed, edited and released by MIT Press.
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This is the thoroughly-2020 story of how it happened.
Like many academics who entered our present period of isolation in mid-March, I was not at all concerned about my job and how to continue doing it.
To be sure, I would have to deal with purely online interactions with some 300 plus students but fortunately I twigged to the value of virtual lectures a few years ago.
Of course I would have to cancel all travel and conferences for the foreseeable future, but in some ways that thought was liberating.
And I would have to deal with motivating a <a href="https://www.joshuagans.com/parentonomics">teenager</a> to learn at home, and with two annoyed college students who had been forced to return home.
Obsession
For the first week I got nothing done, despite being free to do anything.
I couldn’t help but obsess over what was happening in the world.
At first it was frustration at the slow pace of government action as I constantly refreshed scant data on rising infections.
Then it was panic that those actions wouldn’t be enough.
The economic changes were unprecedented. The stock market gyrated and convulsed in tune with fear and other motives that none of us could understand.
What was clear was that if I was home, then so were most other people.
That would leave stores empty, factories shut, and services unnecessary. The vast majority of businesses rely on cash flow to keep things operating, and the cash was most definitely going to stop flowing.
While there were public health pandemic playbooks that were being followed with varying degrees of adherence, there was no economic playbook for this.
Playbook
No one had, to my knowledge, written a paper on how to shut down an economy and then simply restart it again at some unspecified time.
In my mind, the analogy was that we would have to pause things.
We happily shut down most economies each Christmas and no one screams “depression.” The easiest way to do this was to just delay bill payments without consequence.
I could think of ways to do it: loan guarantees, wage subsidies, straight out cash, moratoriums on evictions and foreclosures.
I started to write up my thoughts as if that were original and insightful. And then I saw all of my economics colleagues doing the same thing.
Everyone had simultaneously come to the same conclusion. A new playbook was being invented at the same time, all over the world.
Trillions of dollars were being spent, but it was clear to me that non-economists were somewhat dumbfounded.
Hadn’t economists warned for years against the perils of deficits? Would our children be paying for this? And what was the plan? How long was this going to last and how sure were we that we could just get things back to normal?
We economists had some answers to these questions, but not all of them.
Sharing
Like public health officials who needed to explain in far more detail what was going on with COVID-19, economists needed to explain what they were thinking when they were taking such unusual and exceptional steps.
A week into my isolation, I decided I would write a book.
It would cover all of the economic issues, conundrums and controversies that were emerging. It would put what we knew together with what we did not know and try to help people process what was happening.
It would help me get a handle it as well.
I have written <a href="https://www.joshuagans.com/parentonomics">popular</a> <a href="https://www.joshuagans.com/innovation-equality">economics</a> <a href="https://www.predictionmachines.ai/">books</a> before, but never as quickly.
My plan was to write 10 chapters – one a day – and then publish. In terms of that last step, I could self-publish, but, given the speed at which I was working, I couldn’t be confident I wouldn’t miss things. It had to be peer-reviewed.
Most academic publishers work slowly but I contacted MIT Press and asked if they could do things differently. They came through in ways that I did not anticipate.
As it turns out MIT Press had recently collaborated with the MIT Media Lab on a platform called <a href="https://www.pubpub.org/">PubPub</a>. It is built to allow public comment and review. The plan was for me to write the book and after an editorial review, post the entire thing to PubPub for open review by members of the public.
It was posted on <a href="https://economics-in-the-age-of-covid-19.pubpub.org/">April 7</a>, just 19 days after I first had the idea to write a book.
There were only 8 chapters, but they were longer than I had anticipated – 30,000 words in all. You can see that version <a href="https://economics-in-the-age-of-covid-19.pubpub.org/">here</a>.
Feedback
Then MIT Press sent it out to peer reviewers whom they pushed to return comments within a week.
In the meantime, I kept writing. Things were evolving quickly. More critically, economic research was flooding in as economists from all over the world diverted their energies from what they had been doing to researching different aspects of the crisis.
In the end, my guess is that 80% of the citations in the book were from two months in one year – March and April, 2020!
Finally, I had to incorporate a wealth of comments from open and peer review. The former (public comments) were actually more detailed and useful than the latter (peer comments), which raises issues for the future.
In the end, on April 22 (one week ahead of schedule), the electronic version of my book was published globally.
It was 40,000 words long and hopefully would remain relevant for a few months. It’s for sale <a href="https://www.joshuagans.com/economics-in-the-age-of-covid19">here</a>.
Do I recommend undertaking this type of challenge?
Next book
Overall, I am pleased there is something out there for people to read and digest.
But personally, it was more gruelling than I had anticipated. That wasn’t because of the intensity of the work, but because of its subject matter.
My other books were <a href="https://www.joshuagans.com/parentonomics">positive</a> and <a href="https://www.amazon.com/Finishing-Job-Real-World-Solutions-Education-ebook/dp/B00I9CANXU/ref=sr_1_2?ie=UTF8&amp;qid=1422105981&amp;sr=8-2&amp;keywords=finishing+the+job">optimistic</a>. This one was, for the most part, depressing. The first words were “everything is awful”, and it didn’t get better.
My editor called the first version of the ending bleak. There were days in which I was overwhelmed by my own words and had to retire to a couch until I could pick myself up again.
Thankfully, despite my own feelings, most of those who have read the book have come away concerned and informed, rather than lost and hopeless. That’s something.
The journey isn’t over. MIT Press will publish the usual version of the book in November. I will update it continually for a month or so before then.
There is still so much we do not know. We are learning more about COVID-19 and producing lots of studies, but I think the actual flow of knowledge has been disappointingly slow.
That’ll be the theme of the followup.<img src="https://counter.theconversation.com/content/137489/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
<a href="https://theconversation.com/profiles/joshua-gans-399">Joshua Gans</a>, Professor of Strategic Management, <a href="https://theconversation.com/institutions/university-of-toronto-1281">University of Toronto</a>
This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/how-i-wrote-and-published-a-book-about-the-economics-of-coronavirus-in-a-month-137489">original article</a>.
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Writing a book on the economics of coronavirus in a month: Joshua Gans

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EXPERT OBSERVER
The Westpac-Melbourne Institute Index of Consumer Sentiment plunged 17.7% to 75.6 in April from 91.9 in March.
This is the single biggest monthly decline in the forty seven year history of the survey, taking the Index beyond GFC lows to levels only seen during the deep recessions of the early 1990s (64.6) and early 1980s (75.5).
However, it is pertinent to note that the lows in previous recessions were reached after one to two years of continuous deterioration compared to the one month collapse we have seen here. Certainly we cannot rule out the Index dropping below the historic low of 64.6 we saw in November 1990.
The details of the survey which are discussed below are all very disturbing and reflect the large shocks to jobs and spending. However the most surprising message is the collapse in confidence in the housing market.
The survey comes after an extremely turbulent month in which the Coronavirus outbreak has evolved from serious concern to full-blown pandemic. Confirmed cases globally have soared from around one hundred thousand at the time of the last survey to nearly two million currently. In Australia, the number of cases has surged from just 76 a month ago to around 6,500.
Australian governments have instituted widespread shutdowns on movement and social activity that have effectively banned many forms of economic activity.
While the drop in confidence this month is severe, it could well have been worse. Despite the bleak and threatening backdrop, Australia’s pandemic experience to date has been much less debilitating than that of the hardest hit areas abroad.
The number of cases is high but has not overwhelmed Australia’s health system, with recent evidence showing a clear slowing in new cases that indicates policy measures are working to contain the spread.
These developments give some support to our view that the Australian economy will lift in the December quarter following three consecutive quarters of economic contraction.
We have also seen a swift and effective response from governments, highlighted by the Federal government’s $130 billion JobKeeper Payment scheme.
Westpac has estimated that without the Payment the unemployment rate would have soared to 17% by the end of June compared to a peak of 9% with the Payment scheme.
Note that previous recessions saw the unemployment rate peak at 11.2% (early 1990s) and 10.4% (early 1980s).
All five component sub-indexes fell in April. By far the biggest falls were in the near term outlook for the economy and in attitudes towards spending – reflecting the immediate effects of the shut-down.
The ‘economy, next 12 months’ sub-index recorded a spectacular 31% drop (the biggest monthly fall on record), taking it to 53.7. That compares to a low of 53.2 during the GFC and lows during previous recessions of 34.2 (early 1990s) and 42.1 (early 1980s).
Bill Evans is the Chief Economist at Westpac Banking Corporation
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Consumer sentiment plunges in April: Bill Evans

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The COVID-19 coronavirus is spreading across the world. Initially the epicenter was China, with reported cases either in China or in travellers from China. There are now at least four further epicenters: Iran, Italy, Japan and South Korea.
Although the World Health Organisation believes the number of cases in China has peaked and should fall, case reports are climbing from countries previously thought to be resilient due to stronger medical standards and practices.
In a strongly connected and integrated world, the impacts of the disease will go beyond mortality (deaths) and morbidity (people incapacitated or caring for the incapacitated and unable to work).
Companies across the world, irrespective of size, depend on inputs from China – much more so than during the 2002-04 China-centred Severe Acute Respiratory Syndrome (SARS) pandemic.
In 2003 China accounted for less than one twentieth of world trade. It now accounts for one seventh, making it the world’s biggest importer and an integral part of most global production chains.
Just as important to the world economy, panic is distorting spending. Global stock markets have plunged.
<h2>Fear is as important as trade</h2>
Entire cities in China have closed and travel restrictions have been placed on people entering from infected countries.
The fear of an unknown deadly virus is similar in its psychological effects to the reaction to terrorism threats and produces a high level of stress, often with longer-term consequences.
A large number of people feel at-risk at the onset of a pandemic, even if their actual risk of dying is low.
The International Monetary Fund expects COVID-19 to knock 0.4 points off China’s economic growth target of 5.6% and 0.1 points off global growth, an assessment it will continue to update.
On Monday the Organisation for Economic Co-operation and Development sliced 0.8 points off its forecast for China’s growth and <a href="https://www.oecd-ilibrary.org/docserver/7969896b-en.pdf?expires=1583190648&amp;id=id&amp;accname=ocid194681&amp;checksum=0394E7E583C8F97E4F5F8D9B7B14AE8E" target="_blank">0.5 points</a> off its forecast for Australian growth.
As part of a large research project in the Centre for Excellence in Population Ageing Research (CEPAR) at the Australian National University, we have applied experience gained from evaluating the impact of SARS for the World Health Organisation in <a href="https://www.lowyinstitute.org/sites/default/files/pubfiles/WP_5_03_Globalization_and_disease_FINAL_1.pdf" target="_blank">2003</a> and <a href="https://cama.crawford.anu.edu.au/pdf/working-papers/2006/262006.pdf" target="_blank">2006</a> to <a href="https://cama.crawford.anu.edu.au/publication/cama-working-paper-series/16221/global-macroeconomic-impacts-covid-19-seven-scenarios" target="_blank">seven scenarios</a> for COVID-19:
<a href="https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/317991/original/file-20200302-18287-19xav3t.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a>
The scenarios vary the attack rate (the proportion of the total population contracting the virus), the mortality rate (the proportion of total population who dies), whether epidemic is a one-off (essentially temporary) or recurrs each year (essentially permanent), and whether it spreads globally or is largely confined to China.
<h2>Australian faces a significant hit to GDP</h2>
We find that in the four scenarios where the epidemic goes global, Australia’s GDP which in the 12 months to December grew just 1.7%, would suffer a hit in the first year of between 2% and 7.9%, most likely sending GDP backwards (a recession).
In all countries the sharp hit to growth would be followed by a gradual recovery.
The results are very sensitive to the assumptions used, including government responses in each country.
In the short term, central banks and treasuries will need to make sure disrupted economies continue to function.
<hr>
Australia: percentage change in real GDP
<a href="https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/318203/original/file-20200303-18308-16ajz12.png?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a>
Percentage deviation from business as usual. <a class="source" href="https://cama.crawford.anu.edu.au/publication/cama-working-paper-series/16221/global-macroeconomic-impacts-covid-19-seven-scenarios" target="_blank">Source: McKibbin and Fernando, March 2020</a>
<hr>
While cutting interest rates is an option, the shock will require a mix of monetary, fiscal and health policy responses. Quarantining affected people and reducing large scale social interaction would be an effective response.
Wide dissemination of <a href="https://www.brookings.edu/opinions/simple-steps-to-reduce-the-odds-of-a-global-catastrophe/" target="_blank">good hygiene practices</a> can be a low cost and highly effective response that can also reduce the extent of contagion and keep down the social and economic cost.
The longer-term responses are even more important.
Many governments have been reluctant to invest sufficiently in their health care systems, especially in public systems in less developed countries where many infectious diseases are likely to originate.
<h2>Investments in overseas public health matter</h2>
The idea that any country can be an island in an integrated global economy is being proved wrong.
Poverty kills people. However, the outbreak of COVID-19 shows that diseases, potentially generated in poor countries due to overcrowding, poor public health and interaction with wild animals, can kill people of any socioeconomic group in any country.
There needs to be vastly more investment in public health and development in the richest but also, and especially, in the poorest countries.
Our study suggests big economic costs in countries such as Australia can be avoided through global cooperative investment in public health in all countries.
We have known this for decades, yet politicians continue to ignore the scientific and economic evidence about the role of global public health in improving the quality of life and driving economic growth for us all.<img src="https://counter.theconversation.com/content/132759/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">
<a href="https://theconversation.com/profiles/warwick-mckibbin-9129" target="_blank">Warwick McKibbin</a>, Chair in Public Policy, ANU Centre for Applied Macroeconomic Analysis (CAMA), <a href="https://theconversation.com/institutions/crawford-school-of-public-policy-australian-national-university-3292" target="_blank">Crawford School of Public Policy, Australian National University</a> and <a href="https://theconversation.com/profiles/roshen-fernando-982432" target="_blank">Roshen Fernando</a>, PhD Student in Economic Policy, <a href="https://theconversation.com/institutions/australian-national-university-877" target="_blank">Australian National University</a>
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/the-first-economic-modelling-of-coronavirus-scenarios-is-grim-for-australia-the-world-132759" target="_blank">original article</a>.
Main Photo by <a class="owner-name truncate" href="https://www.flickr.com/photos/jeena/" target="_blank" title="Go to Jeena Paradies's photostream" data-track="attributionNameClick">Jeena Paradies</a>.
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The first economic modelling of coronavirus scenarios is grim for Australia, the world

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EXPERT OBSERVER
The last few weeks have seen escalating concern that a new coronavirus (called 2019 novel coronavirus or nCoV) originating in the Chinese city of Wuhan in Hubei province will become a global pandemic.
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Concern has been heightened after the World Health Organisation (WHO) declared the outbreak an “international public health emergency” on 30 January and the number of cases has continued to escalate.
While this is first and foremost a human crisis, there has been increasing concern that the associated disruption to economic activity will trigger a global economic slump. 
Consequently, share markets have seen falls (ranging from three per cent for global and Australian shares to around seven per cent for Asian shares and 12 per cent for Chinese shares), commodity prices have fallen, and bond yields have collapsed again. 
While the current situation is highly uncertain, the experience with SARS, bird flu, swine flu &amp; Ebola highlight worst-case pandemic fears don’t usually eventuate.
What do we know about this Coronavirus
Here is a summary of information regarding nCoV:
Coronaviruses circulate in animals but can be transmitted to humans and affect the respiratory system. SARS in 2003 &amp; MERS in 2012 were examples. Symptoms can be treated but there are no vaccines or antiviral drugs for them (at present). Like SARS, nCoV looks to have originated in wildlife markets in China.
So far there are over 24,500 confirmed cases worldwide, with 99 per cent of cases in China. But the number of cases is still rising rapidly and more/faster testing could mean many more with spikes in the number of new daily cases.
So far the mortality rate is running at two per cent which puts it above swine flu but well below SARS (which settled around nine per cent). And of those dying, its mainly been older people or those with pre-existing conditions (as with common flu).
Against this, nCoV has been more contagious with total cases well above those for SARS (8000) and patients can be contagious but without symptoms for one to two weeks.
Containment measures – notably in China – have been more aggressive and started earlier than in the case of SARS. These include restricting travel into and out of Hubei province and various countries have restricted (and in some cases banned) foreign travellers entering from China.
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Past experiences
To provide some context it is worth reviewing past pandemics – both real and feared.
There were three influenza pandemics in the last century: 1918-19, 1957 and 1968. The 1957 and 1968 pandemics are estimated to have killed up to 4 million people. However, the 1918 Spanish flu pandemic was the most severe.
While the mortality rate was low, up to 50 million people died worldwide. With a big proportion of the population staying at home, economic activity was severely disrupted, although this was compounded by the ending of World War I.
US industrial production slumped 18 per cent between March 1918 and March 1919. Australian real GDP slumped 5.5 per cent in 1919-20 (but then rebounded 13.6 per cent in 1920-21). The share market impact is hard to discern given the ending of WWI, however US and Australian share markets rose through much of the pandemic period.
The SARS outbreak of 2003 is a more useful guide.
After emerging in China around February 2003, SARS infected about 8000 people (mostly in Asia) in 30 countries over a five-month period and had a mortality rate of about nine per cent. SARS had a big negative impact on the countries most affected as people stayed home for fear of catching it.
GDP in China, Hong Kong and Singapore slumped by over two per cent in the June quarter of 2003. Growth then subsequently rebounded.
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Reflecting SARS, Asian shares fell in April 2003, even though global shares started to move out of a three year bear market from March. The April 2003 low in Asian shares coincided with a peaking in the number of new cases.
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Most pandemics have taken 6 to 18 months to run their course and peter out as measures are taken to slow their spread (eg. hygiene, quarantining, banning gatherings, preventing travel). SARS ended quicker due to the nature of the virus and rapid action by authorities.
In 2005/2006, there was significant concern that a severe strain of bird flu (called H5N1), which was resulting in human casualties, mainly in parts of Asia where people had contact with chickens, would mutate into a form that was readily transmissible between humans.
However, this didn’t really eventuate and as such the economic impact was modest although it did cause bouts of volatility in share markets. Similarly, concern that the spread of swine flu would become a global pandemic rattled share markets for a while around April 2009, and Ebola did the same in 2014, but both quickly faded.
The economic and financial impact of nCoV
After strong double-digit gains over the last year and with investor sentiment pushing up to high levels indicating a degree of complacency, share markets were at high risk of a correction in mid Jan and the fears around coronavirus have provided the trigger.
Given their greater sensitivity to Chinese growth, commodity prices like Chinese shares are down by more and the Australian dollar has fallen to October lows below $US0.67. What happens from here depends on how long it takes for the outbreak to be contained. The higher number of cases than with SARS or swine flu suggests a greater economic impact.
But given the range of possibilities, the best way to get a handle on the economic and investment market impact is to consider several scenarios. Here we consider two.
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1. Containment within the next month or two – the number of cases continues to rise but it remains mainly contained to China (and Hubei) and the number of new cases starts to peak in the next month or so. This would allow travel restrictions to be removed by the June quarter. Under this scenario:
GDP in China and parts of Asia would likely take a two to three per cent hit (taking Chinese GDP growth from six per cent year on year in the December quarter to three to four per cent yoy in the current quarter) as workers stay home and travel dries up. With the Chinese economy now being four times the share of global GDP it was at the time of SARS, this along with some drag on growth in developed countries would knock world growth to around 2.5 per cent year on year (from around three per cent). However, growth would rebound in the June quarter as travel restrictions are removed and things return to normal.
Australian growth could see a 0.2 per cent hit in the current quarter mainly due to the loss of Chinese tourists (which account for 20 per cent of tourism earnings and 0.2 per cent of GDP) but also lower raw material demand and an impact on confidence. With the bushfire impact this could see GDP contract, but growth would rebound in the June quarter.
Against this background share markets, commodity prices and the $A could still fall a bit further in the near term but would quickly rebound by the June quarter. Easier than otherwise monetary and fiscal policies - with more stimulus measures already announced in China - would aid this.
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2. Global pandemic – the number of cases continues to escalate beyond China and aren’t contained until say mid-year.
This scenario would see a bigger and longer negativeimpact on economic activity. Global travel would collapse. Many would simply not come into work – a reasonable estimate is around 20 per cent of workers, although this might be spread over time.
This would see a sharp slump in global GDP and the risk of global recession. Australia would not be immune and would likely see two negative quarters of growth with flow on to education exports to China (which accounts for another 0.6 per cent of Australian GDP).
Share markets would likely fall sharply – maybe by 20 per cent or so - reflecting the huge economic uncertainty. Cash would be the place to be. The $A could fall to around $US0.60.However, economic activity would rebound quickly once it’s clear the pandemic is under control. Share markets are likely to anticipate this. But this wouldn’t occur till the second half of the year.
Concluding comment and what to watch
While there is reason for concern and it is easy to dream up nightmare scenarios, the experience with SARS, bird flu (with “predictions” it could kill as many as 150 million people) and the mini panic regarding swine flu and Ebola tell us that the worst case fears of pandemics usually don’t come to pass. Rapid containment measures provide some confidence this will be the case. As such, our base case scenario (with 75 per cent probability) is one of containment over the next month or two. This could still see more downside in share markets and bond yields in the near term, but they are likely to rebound by the June quarter as economic growth rebounds. The key things to watch are:The daily number of new cases – the SARS experience saw markets rebound once this showed signs of peaking.
The spread of new cases and deaths in developed countries – if this remains limited then markets will also get more confident that the economic fallout will be short lived.
DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist AMP Capital.
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