– Andrew Macken
Five months into the pandemic and one thing has become clear: eradication of COVID-19 is not a viable option for most nations. Instead, most are pursuing various forms of containment strategies aimed at buying time until widespread vaccinations can enable the return of more normal times.
And containment itself is proving to be a real challenge. Even in places that had seemingly broken-the-back of the outbreak, such as Japan, Spain, Israel and here in Australia, recent flare-ups are proving to be frustratingly resilient.
So, we wait for a vaccine. And the news on this front is positive at first glance. As pointed out by The Atlantic this week: “Scientists have gone from discovery of the virus to more than 165 candidate vaccines in record time, with 27 vaccines already in human trials.” It does appear likely that a vaccine with at least some degree of efficacy will be available over the coming months.
Of course, this solves one very important problem but leaves another: the manufacture and distribution of said vaccine. At best, it will take many more months to make available the 300 million doses that are required for the United States, the 400 million doses required for Europe, the more than one billion doses likely required for China, etcetera. And this assumes that people will be willing to take the vaccine. In May, a survey from The Associated Press-NORC Center for Public Affairs Research found that 20 percent of Americans said they plan to refuse any COVID-19 vaccine.
The US Department of Health and Human Services has proudly announced its Operation Warp Speed aimed at accelerating the delivery of doses domestically. This is a worthy program. But for international borders to open back up, some degree of global immunity is ultimately required, not just national immunity. This could well take years, not months.
Within this context, governments are faced with a dilemma. Should large-scale government support for those who need it be continued? Or should public deficits and associated government borrowings be limited to some designated level?
In Australia, the sensible JobKeeper and JobSeeker programs will start to be ratcheted down in September. In the US, political disagreement over continued government stimulus has emerged with some Republicans committing to vote against any Phase 4 package on the basis of excessive government spending.
But is this really a dilemma? As Australia’s Finance Minister, Mathias Cormann, put it last week, “In the circumstances, what was the alternative? Are you suggesting that we shouldn’t have provided the support we did to boost our health system, to protect jobs, to protect livelihoods?”
It is likely this is will be the simple reality for governments for many more months to come. There really is no alternative. From an economic perspective, if government support is withdrawn, growth would likely turn sharply negative and unemployment would increase further. Asset prices would also likely fall, exacerbating any decline in consumption. No government wants this. And certainly, no US President seeking re-election in less than four months wants a scenario like this.
RBA governor, Philip Lowe, said recently that “It’s very important that we keep the support measures going,” noting that the IMF has flagged the early withdrawal of government stimulus as being the policy mistake the world is at most risk of making.
And with central banks pursuing government bond buying programs en mass, they are ensuring that governments can finance themselves on favourable terms for the foreseeable future. The message from central bankers is clear: there is no alternative for governments. Today, and over the coming months, economies need their support. And concerns around excessive government indebtedness should be ignored for the time being.
Andrew Macken is the Chief Investment Officer of Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.