The Delta equation has changed
Lockdowns have metastasised into a long term economic drag
The RBA surprised many last month by not stepping back from it’s scheduled QE taper despite the lockdowns roiling Greater Sydney.
This decision was premised on two key points:
Despite what some might think Sydney is not Australia, and regional shocks are best offset by targeted fiscal policy instead of blunt nationwide-monetary policy, and
Experience from the 2020 lockdowns shows that once the virus is tamed the economy bounces back relatively quickly.
I agreed with that logic at the time (even if I thought the RBA should ease for other reasons). But now the key variables in the Delta equation has changed.
First it has spread to Victoria and regional NSW. While Sydney is only a part of Australia, it’s two largest states make up more than half of the nation’s economy. It is now clearly a “national emergency” and one that country-wide policy tools should be used to fight.
The second difference is that it is now clear that the Delta variant can no longer be eradicated. Certainly not in NSW, maybe not even in Victoria. Victoria locked down 36 hours after the first case was found and has implemented a curfew in what is essentially the hardest form of lockdown possible in Australia. While the latest round of restrictions have yet to have a chance to impact the data, cases have only continued to grow.
If Delta cannot be eliminated - or even have it’s R number reduced below 1 - then the lockdowns will be enacted for many months to come, much longer than initially estimated. Perhaps more importantly the parts of the economy that require large crowds to gather may be constrained even once lockdown formally lifts.
That means the Delta outbreak will affect a much larger share of the economy, for a much longer period. These two facts make the case for further monetary easing much stronger. Monetary policy is generally thought to only effect the economy with a lag. Decisions made today will take months to result in higher growth and more jobs. But it is clear that the probability that parts of the country will be hampered by public health restrictions even towards the end of the year is high.
These developments in the past few weeks should certainly led the RBA to shelve their plans for a QE taper and get them to even consider upping their asset purchase trajectory.
The facts have changed. The RBA should change their minds too.