So why can’t we stimulate our way out of the virus crisis? One problem is that this is a different kind of crisis. Most of the economic problems we’ve had over the past 30 years were what economists call "demand shocks". These are sudden changes in circumstances that create a wave of fear and lead to a rapid slowdown in spending. Government stimulus works by showering consumers with money and coaxing them back to the shops. Illustration: Jim Pavlidis Credit: But the early economic impact of COVID-19 is not a demand shock caused by consumers unwilling to buy. It’s a supply shock caused by businesses having less to sell because their factories are closed, their supply chains are disrupted and their workers are quarantined at home. Trying to stimulate your way out of a supply shock is like throwing water on a grease fire. In a worst-case scenario, stimulus can exacerbate the shock as panic buying creates shortages and rising inflation. This week was a dramatic demonstration of the impotence of stimulus in the face of a supply shock. The US Federal Reserve delivered the largest emergency interest rate cut since the GFC. In response, the US stockmarket shrugged, then tanked. South Korea announced a $10 billion stimulus package, but it didn’t make a jot of difference to the immediate problem that local factories can’t reopen until critical components from China start flowing again.

While stimulus can’t do much to shield us from the immediate effects of a supply shock, it can still be a useful tonic to calm markets and avert widespread consumer fear that may spark a damaging demand shock. Loading But on this front, Australian policymakers face another problem – there isn’t much stimulus ammunition available. In 2008 the Australian economy was saved by stimulus from the four C’s: China, currency, cheques and the cash rate. China responded to the crisis with a tsunami of infrastructure spending that reflated Aussie commodity prices. The Australian dollar plummeted from 95¢ to 65¢ against the greenback, which massively boosted our exports. The government mailed $900 cheques to households which quickly flowed through the tills of retailers. And finally, the RBA slashed the cash rate a whopping 400 basis points from 7 to 3 per cent, saving thousands on the average Australian mortgage. The sobering question now is: how many of those stimulus measures are available today? The answer is very few. China is the cause of the problem, not the solution. The Aussie dollar is already below 65¢ and doesn’t have the same room to fall. There is no budget surplus to spend and the Reserve Bank of Australia told Parliament this week it only had capacity for one more interest rate cut. In 2008, we had a locker full of ammunition to fire at the crisis. Today that locker is bare. However deep the short-term impact of COVID-19 becomes, its real legacy will be its long-term effects. Australia’s economy has already slowed significantly over the past year, and the virus could accelerate our transition to a new, less benign economic era, characterised by softening economic tailwinds and a darker geopolitical backdrop.

Australia has enjoyed a remarkable period of 28 years of prosperity. This was the longest run of unbroken economic growth, not just in Australia’s history but in modern world history among all advanced nations. Loading China’s economic transformation has been a critical tailwind behind Australia’s three decades of unprecedented success. Our resources are the juice in China’s industrial machine, enabling its manic construction of factories, railways, skyscrapers and manufactures. As the world's largest exporter of both iron ore and coal, we are the ying to China's yang. The quarry on its doorstep. For decades, the export of resources to China has turbocharged our growth and filled our budget coffers. And over the same period, Australia’s imports from China grew by almost 5000 per cent as our shops – think Kmart, Target, JB Hi-Fi, Rebel Sport and many others – were swamped by Chinese clothes, toys and electronics goods at eye-popping low prices. Cheap Chinese imports were welcomed by consumers, but they also pushed down inflation and helped the RBA to keep interest rates low. Today, at least 760 million Chinese, or more than half the country’s population, are under varying degrees of residential lockdown. Even if the rate of spread of the virus moderates over the next few months, the economic effects of the virus could expose many of the underlying fragilities in the Chinese economy. It was already slowing and changing, but the epidemic will accelerate its transition. Australia needs to be alive to the possibility that the tailwinds we have enjoyed for the past three decades may be changing.

So how should Australia respond to the crisis? First, we need to develop a short-term policy response that is effective against a supply shock. That will mean supporting firms through periods of disruption that may be caused by quarantined workers or lack of critical raw materials. This support should come in the form of targeted assistance to vulnerable firms, including small businesses and those exposed to the hardest hit sectors such as universities, tourism and hospitality. Loading Second, we need a plan to ensure that we contain any follow-on impacts of the crisis. The 2008 crisis spread from the US mortgage market to a full-blown demand shock because it froze credit markets and exposed high levels of corporate and household debt. The government needs to ensure that credit continues to flow so companies can keep up with payments during supply-chain shutdowns and households aren’t spooked by any loss of income resulting from quarantines or work stoppages. Third, a critical element of our response to a global crisis is international co-operation. In the last crisis, the world acted collaboratively to establish the G20 Leaders Summits, co-ordinate stimulus measures and make joint investments in multilateral institutions through huge increases in resources for the International Monetary Fund and World Bank.

But that was then, and this is now. The internationalist leaders at the helm during the last crisis – Barack Obama, Gordon Brown and a suite of liberal Europeans – have been replaced by a cadre of nationalists including Donald Trump and Boris Johnson. We have to hope that the world responds to the epidemic by embracing global co-operation rather than leaning into the recent trend of authoritarianism, unilateralism and xenophobia. Loading Finally, the crisis will require Australia – governments, businesses and workers – to think long-term about our economic future. While nobody hopes for crises, they can have positive effects by accelerating change and forcing us to deal with hitherto overlooked challenges. The 2003 SARS crisis in China is widely credited with turbocharging the development of China’s digital economy as consumers flocked to new e-commerce platforms such as JD and Alibaba to avoid the risk of crowded shopping malls and markets. Australia should seize the opportunity to tackle some of our long-ignored challenges. We should use the crisis to make progress on the future of work, including providing employees with more flexible work arrangements and greater support for remote work, which would ameliorate the health crisis in the short term and improve wellbeing in the long term. We need a cultural and technological shift towards teleconferencing and virtual meetings to reduce the impact of business travel on the environment. We should take the opportunity to accelerate Australia’s transition to digital infrastructure. The crisis should prompt us to finally develop more sophisticated online educational platforms to offset some of the effects of school closures but also to improve the long-term accessibility and efficiency of our post-secondary education system.