By Leon Gettler >>
CENTRAL BANKS around the world are cutting interest rates to deal with the coronavirus but it won’t help, Rabobank economist Michael Every has warned.
The coronavirus (Covid-19) and its impact is unprecedented and central banks don’t have a clue how to deal with it, according to Mr Every.
“The question I have to ask, and I think I know the answer myself as I am asking it, is: Are lower interest rates going to be a cure for a deadly virus? Are lower interest rates a cure for having your supply chain disrupted so you can’t get key components? Are lower interest rates a cure for everyone staying home and not buying anything? And the answer is no, no and no,” Mr Every told Talking Business.
“It’s a nonsense to believe central banks are going to get us out of this, were a worst case scenario to unfold in terms of this virus getting much uglier. If it were to get worse, I don’t see what the RBA for example is going to do about it. Or the Fed, Or the ECB. Or the Bank of Japan. Or the people at the Bank of China.
“It can provide infinite liquidity to companies that are without a key component, without which they have no business. It can provide infinite liquidity to households that don’t want to spend it because they’re not going out.”
DOMINO EFFECT KNOCKS ON
Michael Every said the problems in China would create a domino effect in which companies around the world will not be able to get the components they need to produce the goods to sell to consumers.
He said it will be a demand shock and a supply shock. The impact is impossible to calculate but it is clear everyone will be swept up in it.
“Really at root here, what this crisis is underlining is how fantastically, how magnificently stupid globalisation was as an idea because you build an entire pyramid of just-in-time very complex supply chains centred on China, or in Australia’s case, providing input into a China-centric supply chain, and of course, the whole thing is massively fragile if anything goes wrong anywhere,” Mr Every said.
“We are constantly pricing for perfection, which is insanity when you consider in the long run, perfection doesn’t last that long.”
LIQUIDITY HOLDING PATTERN
Mr Every said banks can provide small businesses with more liquidity during the coronavirus crisis, but as with the global financial crisis, that puts everything in a holding pattern.
When business conditions return to normal in several months time, the small restaurants or factories will have a bigger debt load, and that will be a problem for the banks.
“We are heading for really uncertain territory on multiple fronts,” he said. “The RBA hasn’t managed to get inflation right, they can’t get employment right. What on earth makes them think they can sort out a virus as well?”
The bond markets are now forecasting a recession and Rabobank has pencilled a mild US recession this year, which will result in a technical global recession.
“That was pre-virus. If you throw the virus into the mix, it’s a no-brainer that you’re going to be looking at a recession,” Mr Every said.
“Everywhere you look, there are red light flashing suggesting this could be a very strong breeze which blows over what was a feeble upturn at the beginning of 2020, which pushes us into a genuine global recession.”
Hear the complete interview and catch up with other topical business news on Leon Gettler’s Talking Business podcast, released every Friday at www.acast.com/talkingbusiness.