The entire interest rate community in Australia is caught so far behind the curve it is shocking. COVID-19 is loose worldwide with cases doubling every four days and describing a classic parabolic curve. At the current rate of infection, by the April RBA meeting there will 3.3m infected. If left unchecked, by the May meeting it will by 424m:
The good news is twofold. Data is pointing to COVID-19 being a winter virus so it will burn out fast through May in the northern hemisphere. Second, China has shown the world how to prevent the parabola. The bad news is that that is total economic shutdown.
So, China is not going to rebound in a v-shaped recovery. Japan and Korea are progressively entering the same lock-in procedure. Europe is rife with the virus and will be forced to raise national and local borders this week, or it will turn into a giant Wuhan. The US will very likely be unable to keep it out and follow.
Australia is in the worst position. We will suffer the exogenous shock from the northern hemisphere shut down, followed by the endogneous shock of our own winter shut down.
We are entering a national emergency that includes an unprecedented economic shock that has already delivered:
- a stall speed economy;
- a supply side shock as North Asia shuts;
- a collapse in tourism and education;
- a brick wall stall for new property sales;
- an onging equity market crash;
- falling retail sales.
Ahead lies:
- huge supply side disruption;
- big falls in commodity prices;
- a stall in migration flows;
- stalling and falling property prices through winter;
- a hoarding spike followed by consumption collapse for an extended period;
- renewed household deleveraging;
- a private investment freeze;
- ongoing construction bust.
The risks to financial stability is as plain as day from a shock to both bank assets and liabilities as house prices roll and international funding costs rise. These will also go parabolic if we are not prepared.
Prime Minister Scott Morrison has rightly declared an international pandemic and put the national response on an effective war footing. Time for the snoring RBA to wake up and join the national interest push with a 50bps cut tomrrow and announcement that QE will follow in April.
