Australia's exceptional efforts in flattening the COVID-19 curve quickly and crushing viral transmissions means that we may be a victim of our own success. The government's fiscal stimulus may have been calibrated for a situation that is much worse than the one we face.

New analysis presented by Deutsche Bank economist Torsten Slok shows that amongst the 20 countries he examined, no nation has provided more fiscal support as a share of GDP than Australia in revenue and expenditure terms.

And yet according to our real-time COVID-19 infection and fatality tracking systems, Australia’s new infection numbers peaked at the start of the month. This was slightly ahead of our contrarian March forecast for a peak in US and Australian infections in early April (the US peaked on April 11).

In fact, it appears that Australia’s containment efficacy has been superior to almost all developed countries globally save Hong Kong and New Zealand, which is a tribute to Prime Minister Scott Morrison and the state premiers' policy fortitude. As a disease, COVID-19 has all but disappeared across the land. (This does not mean that there will not be small outbreaks in the future that require targeted lock-downs of specific areas, as we have seen in Tasmania.)

My fear is that the huge size of Australia’s fiscal stimulus could reduce at the margin the incentive for workers and businesses to spin activity back up. And it could unnecessarily damage Australia’s fiscal balance, burdening future generations with massive amounts of debt that was not actually warranted.

Of course, there is a circularity here: the longer you want to contain, the more stimulus and debt you need. The one thing we now know with certainty is that Australia does not need to hibernate businesses for six months, as we argued in March.

Another fear is that it might be much harder to reactivate businesses the longer we wait to do so, with the permanent economic damage increasing as a function of time.

Finally, the permanent damage wrought by lock-downs---as represented by a structural increase in unemployment, risk-aversion (ie, reduced animal spirits), and, perhaps on a more positive note, the death of Zombie businesses---might be bigger than we currently understand.

We have long argued that the rise of over-leveraged and unprofitable businesses, especially those that issue high-yield bonds, is a source of huge investment risk.

The classic case is Virgin Airlines, which in October last year issued investors a $325 million bond on the ASX. That security (ASX: VAHHA), which we did not touch because Virgin was a zombie from central casting, has traded down from $100 to $39 before it was suspended. It is presumably worth nothing now and will join the other "zeroes" in a high yield bond graveyard that is about to get increasingly full as defaults soar globally.

This is also a growing problem for the high yield debt funds listed on the ASX via Listed Investment Trusts (LITs), which suffered steep 20 per cent to 40 per cent plus losses in March, and traded at enormous discounts to their net tangible asset values, as we had repeatedly warned they would do over the last year.

Given Australia’s success with containment and the risks of over-stimulating, I would urge the government to fast-track staged and targeted exits from the current strategy as soon as possible (and work to commensurately withdraw its stimulus measures as activity normalises).

Contrary to some claims, there are potentially enormous economic, social, and health costs that directly result from a depressionary containment strategy that kills activity with the upside that it has the profound benefit of cauterising COVID-19. To blindly ignore these trade-offs on the basis of hope rather than any empirical evidence would be a unique form of policy madness.

Pak Wong

I totally agree. At this point, the cost outweighs the benefit many times over. One can only imagine the enormous debt we have to pay. I think the Australian government should just isolate the above 65 group until effective vaccine, or enough herd immunity(above 65%) is available. Aged care workers, or special delivery personnel tending to the isolated group should be tested weekly. No visitation from family members without Covid-19 tests. Ease away from social distancing rule with the below 65. Maybe 4, 6, 8 and so on. Continue testing, hand washing, and maybe wearing masks. Covid-19 shed the most first few days, when the infected persons show no symptoms. The only question we have to ask(project) is: Is there enough ventilators for the minority who need them while acquiring herd immunity(those under 65) ? I suspect herd immunity can be acquired sooner than effective vaccine. The long wait for availability of effective vaccine in Australia will result in more deaths from all other causes. In testing only the patients not on ventilators at University of Chicago, Remdesivir has NOT proven that it works. Two of the 113 patients died. 1.7% died. Isn't that the same as no medication ?

David spalding

Superb analysis-Mr Joye has hit the nail on the head once again.

John Phokos

Let's start with getting appropriate PPEs in the hands of all our medicos first.

Christopher Joye

Thanks guys appreciate the feedback

Raj Ipp

I agree with the overall tone of the article. However, I believe it is premature to think that the cost will outweigh the benefit (I refer to Pak Wong comments below). This pandemic is not a flu type situation where you know what to expect. It is a new virus and consequently the measures you take are exceptional as you do not know what will happen. You might go for an early reopening of the economy as Singapore did and you get hit by a second stronger wave. That is what was observed with the Spanish flu as well. Herd immunity remains a myth - good to hear but it is not happening.The economy can and will recover. You will not see the dead come back to life however. Sorry for the gruesome picture but that is what is happening.

Peter Sampson

Australia spends billions on military equipment and prepares a defence force of many thousands of Defence personnel to fight an invader yet has insufficient infrastructure, logistics PPE ,personnel, equipment to fight a war of disease COVID 19. Let's get our priorities right.

Matt Daniell

Your logic Raj should perhaps consider the people who die because the economy dies. Why is a Wuhan-flu death more important that a death from xxxx reason due to peripheral issues from the Wuhan Virus, or any death for that. Then the discussion can start?

Pak Wong

A reply to RAJ IPP Lives or livelihoods. We choose lives when we know that the pandemic is short, eg., less than six months. What if this pandemic drags on and on for five long years before effective vaccines are available against all the different mutation ? Vaccines will be weaponized for political gain in one particular big country. If no effective autogenous vaccines against all the 31 mutations(and more to come, just wait till a Coronavirus meet a Hendra virus) are produced in Australia, we are on our own. Given that we will not likely produce all the different vaccines anytime soon, the next question is, how long can we lock the country down before going bankrupt. Can we live with the effects of RBA adding zeros to the digital money printer on the computer ? I personally will choose livelihoods for everyone with all the necessary precautions. It is still far cheaper to send all the seniors to happy communes, with visitations only by people tested negative, like, maybe on a phone app that can be scanned at the gates before entry. Seems like this will drag on for a few years: From Beijing News .net - Overall, the researchers identified 31 strains of the virus - 19 of which are new. They explained: “19 of the 31 identified mutations are novel, despite the relatively early sampling dates, indicating that the true diversity of the viral strains is still largely underappreciated.” Based on their findings, the researchers concluded that while a coronavirus vaccine may help some patients, it may not be effective against some strains. They concluded: “Finally, similar to flu, drug and vaccine development, while urgent, need to take the impact of these accumulating mutations, especially the founding mutations, into account to avoid potential pitfalls.”

Roger P

Enjoyable article again Chris, and all valid points - well put. I never posted anywhere but isolation has me a bit bored :) and I can touch type... How about some cold hard facts like how much has been spent taking into account all costs ie govt spend plus interest over ten years/financial instruments loss/dividends reduced/incomes lost/super lost/increased welfare over the next ?? years per life saved and compare that to historical spends to medically save lives. It seems to be morally bankrupt and idiotic to spend this much compared to the usual spend we have to save lives medically with a 'normally' functioning economy to sustain it.... ie we could easily use more ambulances and that would save more lives too.... it is simply a budget we can afford. As individuals rational decisions in the face of death are very difficult - but the government is there to manage those very issues at this scale making the cold/hard decisions and in my opinion the price being paid (both financial and emotional) for the lives saved is orders of magnitude too high as it is being forced on everyone with no choice and the usual due diligence in parliament has been lost. Those most at risk should be most protected ie my wife works in aged care and it is not yet mandatory for all workers/visitors to wear masks to protect residents - WTF as the saying goes, a leadership fail up there with Ruby Princess as the aged homes are our single most concentrated, highly populated and vulnerable to death places for those infected. Everyone should be free to make our own choices about the health risks we accept and fundamental lifestyle we live. The increased suicide rate alone which was known to occur because of these countermeasures will smash the CV19 toll on this path - the affordable balance has simply been lost. Substantial removal of the measures must be made immediately and not trickle fed out over three to six months - perhaps make a step change every week where the change can be statistically correlated to the case results so if it is too fast then increase measures in again - but maybe keep the ICU beds close to full as starting target.... As to taking exceptional measures - leadership is charged with finding the balance and has extensive resources to help do it well. I do not have to pay for everyone else to live other than the baseline, sustainable medicare system - and it is a pretty good one as it is by any internationals standards. Believe it or not, ideologically we can not ascribe a dollar figure to life, but in reality we certainly do - and who pays for it as well !

Pak Wong

You deserve a five star for your most accurate "Peak Virus" charts, graphs and projections with "cold calculations". Would you challenge your team to do another one dealing with projections of what is to come with different degrees of lockdown, selfisolation and all the preventive measures. It is a six trillion US dollar question, as sued by one American lawyer. I trust that your team can do it better than anybody I have read.

Carlos Cobelas

Pak Wong, experience overseas has shown that once hospital systems become overwhelmed, the death rate rises far higher than 1 -2 %. it was 11% in northern Italy. it also impacts on people who die of other ordinary health problems such as heart attacks, strokes, etc as they cannot access normal medical attention. overseas experience has shown that plenty of people under age 65 have died and/or needed Intensive care treatment, even in previously healthy people. it is too simplistic to simply isolate people over 65 as a solution. The US Fed has done research showing that in the Spanish Flu epidemic of 1915 - 1918, places that shutdown for longer actually made a stronger economic rebound than places that did not shutdown much.

Ming M

Thanks Christoper for sharing another great piece of analysis. What is your outlook on inflation moving forwards? - How will this affect Australian housing? Does your housing prediction need an adjustment in the face of a possible spike in inflation and interest rates? - How will passive bond index funds in most people's portfolios respond? What are the alternatives? - What are the scenarios moving forwards, probabilities and things to watch moving forwards? I thought your views on The Jolly Swagman Podcast #84: The Price Of Uncertainty was insightful. I would love to see a write up on your views in regards to inflation and the effects on asset prices.

Pak Wong

A reply to CARLOS COBELAS : Age is best explainer of coronavirus infection differences between countries but there is another surprising factor Scan the list of the countries hit by coronavirus and one thing stands out -- how few emerging markets there are. By confirmed cases, the epicenter of the outbreak, China, has fallen all the way to seventh, just ahead of Iran. Deaths from COVID-19 also have been mostly a developed world phenomenon. There are now over 2 million cases of COVID-19 globally, and 138,487 people have died, according to data aggregated by Johns Hopkins University. The first big advantage emerging markets have is their relative youth, says Marko Kolanovic, global head of quantitative and derivatives strategy at JPMorgan. The average age in Africa is 19.7 years, whereas it’s 43.1 years in Europe. “For an exponentially increasing mortality curve, this makes a huge difference,” he writes. If you look at COVID-19 mortality per million plotted against percent of population over 60 years old, the difference is clear. Mortality plotted by percent of population over 60 years old. But he also highlights another issue -- vaccination for tuberculosis via the BCG vaccine. Countries that either never had BCG vaccination programs (Italy, Netherlands, Belgium, USA) or discontinued it some time ago (Spain, Sweden, U.K., Switzerland, France) are faring worse, he says. That’s one area where emerging markets have western nations beat, as most all of them do have mandatory BCG vaccination. One that doesn’t is Ecuador, with the highest emerging-market COVID-19 mortality. His analysis finds a 50% reduction of prevalence and mortality in those countries with BCG vaccination. Now, correlation doesn’t prove causation. The World Health Organization says that, “in the absence of evidence, WHO does not recommend BCG vaccination for the prevention of COVID-19.” Studies are under way to see if there is a connection between the BCG vaccine and lower COVID-19 incidence. Finally, emerging markets tend to be in hotter and humid areas, Kolaonvic notes. A number of research papers that indicate that higher temperature and humidity may reduce COVID-19 infection rates, he says.

Olivia Page

The shut down was necessary because Australia was unprepared. The alleged stockpile of PPE never materialised. Youtube videos from overseas show medical staff wearing ‘spacesuit’ PPE which is not what is available in OZ. PPE which had previously been freely available to staff was confiscated and metered out according to rules made by administrators not medicos. With Covid numbers rising , there was a real risk of mass medical and nursing retirement. The analogy ‘sending soldiers to the front without weapons !’ was being shared on all private medical webchats. Practically all the Oz PPE comes from China! So now we know the virus is likely to behave more favourably in Oz ( we re lucky not smarter or better equiped than anyone ! Our geographic isolation, hot dry weather, big country few people natural social distance, milder strain of the virus , who knows…) the medical workforce is reassured , nothing s changed in term of the non availability of PPE, the stockpile is a myth … there is no point continuing this shutdown. We just have to adapt ! Survival of the smartest !!

Pak Wong

If I may add, OLIVIA PAGE, in order to prevent cross-contamination, PPE must be changed between samplings is a huge waste of resources. There should just a no touch, automated sampling booth fitted with UV light where an individual can just sample oneself and drop the swab in the test tube. The automation part will take care of capping/labeling the tube, taking the photo and temperature. The camera will be watching to ensure integrity. We must come out the other side smarter. Should we design it, and wait for it to be shipped from China could be a whole other political issue.