Wednesday, March 04, 2020

Support package gains shape as GDP turning point swamped

The good news is our economy was performing better than had been thought in the lead-up to the bushfires and coronavirus.

Updated figures in Wednesday’s national accounts show the economy grew 0.6% in the three months to September, rather than the 0.4% previously reported, and a healthier-than-expected 0.5% in the three months to December.

Combined, these figures pushed annual economic growth up above 2% to 2.2% for the first time in a year in which it had been below 2% for the longest period since the global financial crisis.

Annual GDP growth

Through-the-year economic growth by quarter. Source: ABS 5206.0

Not to put too fine a point on it, it looks as if we were actually experiencing the the “gentle turning point” repeatedly promised by Reserve Bank Governor Philip Lowe.

As Lowe put it during the second half of last year:

After having been through a soft patch, a gentle turning point has been reached. While we are not expecting a return to strong economic growth in the near term, we are expecting growth to pick up.

The figures show the economy began (gently) picking up after the Reserve Bank began cutting rates in June. Counting this week’s latest interest rate cut, it has cut four times.

But the coronavirus and the bushfires have consigned the turning point to history.

Negative growth now possible

Not for a minute does Treasurer Josh Frydenberg believe the economy continued to improve this quarter, the March quarter.

Reminded that the support package promised by the prime minister will come too late for the three months to March, and reminded that many businesses haren’t been able to trade much, Frydenberg was asked to assess the risk the economy might now be going backwards, a state of affairs that if it continued long enough would be a recession.

Read more: We're staring down the barrel of a technical recession as the coronavirus enters a new and dangerous phase

He replied that the Treasury believes the bushfires alone will shave 0.2 points from growth in the March quarter. Added to that will be the risk from the spread of the coronavirus, which he believes will be “substantial”.

Tonight (Wednesday) Frydenberg and Treasury officials will take part in a phone hookup with other members of the International Monetary Fund to discuss developments including interest rate cuts in both Australia and the United States.

Treasury update on Thursday

The Treasury will finalise its estimate of the impact of the coronavirus on March-quarter GDP later in the evening and report it to a Senate estimates hearing beginning at 9am Thursday.

It means we will know the likely impact at about the same time as the treasurer.

To support retirees hurt by four near-consecutive rate cuts, the treasurer is considering cutting the deeming rate – the rate investments are deemed to have earned for the purposes of the pension income test. It’ll be the second deeming rate cut in the space of a year and will make it easier for retirees earning very little to remain on the pension.

Read more: They've cut deeming rates, but what are they?

The focus of the support package will business investment, which slid an unexpected 1.1% in the final three months of the year and 3.4% over the course of the year in defiance of budget forecasts it would climb.

Standard of living slipping

Although not ruling out support for householders, Frydenberg said mortgage holders had done well out of the past four rate cuts. Households with A$400,000 mortgages could soon be paying $3,000 less per year than they had in June.

Living standards, as measured by the Reserve Bank’s preferred measure, real net national disposable income per capita, went backwards in the December quarter, slipping 1.3%. Over the year, it climbed just 1.2%.

Read more: The first economic modelling of coronavirus scenarios is grim for Australia, the world

Household spending recovered somewhat, climbing 0.4% in real terms in the December quarter after inching ahead only 0.1% in the September quarter.

Throughout the year to December, real household spending grew 1.2% at a time when Australia’s population grew 1.5%. This means the consumption of goods and services per person went backwards.

Government spending provided substantial support. Over the year to December public spending on infrastructure grew 4.1% in real terms.

Deputy Prime Minister Michael McCormack said on Wednesday he would try and boost that by asking state and local governments to bring forward whatever projects they could, to start work in the next three to six months.

Recurrent government spending grew 5%.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Tuesday, March 03, 2020

One word repeated 9 times explains why the Reserve Bank cut: it’s ‘coronavirus’

Never has a virus featured so prominently in a Reserve Bank statement.

The word “coronavirus” is mentioned nine times in the governor’s seven-paragraph statement.

His board cut the cash rate from an all-time low of 0.75% to a new all-time low of 0.50% “to support the economy as it responds to the global coronavirus outbreak”.

Up until the coronavirus, it had looked as if “the slowdown in the global economy that started in 2018 was coming to an end”.

The coronavirus has “clouded” that outlook.

It is “too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path”.

Financial markets have been volatile “as market participants assess the risks associated with the coronavirus”.

In most economies, including the United States, there is an expectation of further rate cuts.

The coronavirus is having a “significant effect” on Australia’s real economy, particularly in the education and travel industries.

Read more: The first economic modelling of coronavirus scenarios is grim for Australia, the world

The uncertainty is “also likely to affect domestic spending”.

GDP growth in the March quarter (but not the December quarter whose figures will be released on Wednesday) is likely to be “noticeably weaker than earlier expected”.

Once the coronavirus is contained, the Australian economy is expected to return to an improving trend.

But given the evolving situation, it is difficult to predict how large and long-lasting the effect will be.

Summing up, the bank says the global outbreak is “expected to delay progress in Australia towards full employment and the inflation target”.

It decided to cut rates to provide “additional support to employment and economic activity”. Importantly, it will continue to monitor developments closely with a view to doing more.

The final sentence, the one which usually carries the key message, says: “the board is prepared to ease monetary policy further to support the Australian economy”.

Would it have cut without the coronavirus?

It probably wouldn’t have cut without the coronavirus. It most likely would have had to cut at some point because the economy is weak. We will get an update about how things were in the three months to December on Wednesday, but the news up to the end of September was awful.

Household spending, which accounts for more than half of gross domestic product, barely budged. Over the year to September it grew just 1.2% in real terms, the least since the global financial crisis. Australia’s population grew 1.6% in that time, meaning the volume of goods and services bought per person went backwards.

Early figures on private new capital expenditure which will be incorporated into the national accounts released on Wednesday show business investment went backwards over the December quarter (down 2.8%) and over the entire year (down 5.8%).

The May budget and the December budget update forecast a jump in business investment, which it is hard to see happening.

Read more: Now we know. The Reserve Bank has spelled out what it will do when rates approach zero

Governor Philip Lowe has been reluctant to cut in part because he is running out of traditional ammunition.

He has said that for practical purposes the next step – 0.25% – is zero, a point beyond which he would need to use unconventional measures (which have been used so much overseas they are no longer that unconventional) to stimulate the economy further.

The most likely one is buying government and mortgage bonds from investors in order to force money into their hands, making the cash rate graph the bank has been updating for 30 years now no longer relevant as an indicator of what it is doing to stimulate the economy.

Reserve Bank cash rate

He has decided to cut because he is contractually obligated to do what he can to contribute to “the economic prosperity and welfare of the people of Australia”, which is at risk.

What good will the cut do?

Westpac and the Commonwealth Bank announced they were passing the cut on to borrowers straight away after an appeal by Prime Minister Scott Morrison to their better natures.

The government would absolutely expect the four big banks to come to the table and to do their bit in supporting Australians as we go through the impact of the coronavirus. I don’t see it any different to what Qantas did when we called out to Qantas and we said, we need your help, we need to get some people out of China.

Before today’s decisions the average standard variable mortgage rate was 4.7% The average basic variable mortgage rate was 3.05%. Today’s cuts will take it to 2.8%.

They will save many mortgage holders an extra A$30 per month on repayments on top of the $150 saved since June. That will allow them to spend more or to borrow more by extending their mortgages, further increasing the financial attractiveness of investments such as solar panels or home insulation, and perhaps further supporting home prices which have turned up since the bank began cutting.

Where mortgage holders direct the proceeds of the cuts to Australian businesses, it’ll help keep them afloat or give them the confidence to borrow for expansion at record low interest rates.

Although it is often said that interest rate cuts have less effect when interest rates get low, there is no particular reason to believe this is the case. There is reason to believe interest rate cuts have little effect when consumers and businesses have other reasons for not borrowing or spending much, which might well be the case at the moment.

What will the government do?

The government is drawing up a stimulus plan. Just don’t call it that.

Morrison says it will:

be a targeted plan, it will be a measured plan, it will be a scalable plan, we will ensure that we do not make the same mistakes of previous stimulus measures that have been put in place.

That probably means he won’t be delivering cheques to households as Labor did during the global financial crisis. The Coalition tried something similar, delivering out-sized tax refund cheques after the May budget, and it didn’t work that well.

He’ll almost certainly announce new investment allowances for businesses; if necessary, ones that effectively pay them to borrow.

And he and his ministers will be surveying the economy sector by sector.

Read more: We're staring down the barrel of a technical recession as the coronavirus enters a new and dangerous phase

He has spoken personally with the bosses of Coles and Woolworths seeking assurances they won’t run low on supplies. He says if necessary they can talk to each other, something normally not allowed by competition rules.

They have already talked to Kimberly Clark, which manufactures toilet paper. It has set up a line of production in South Australia to ensure shops don’t run out.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Tuesday, January 28, 2020

2020 survey: no lift in wage growth, no lift in economic growth and no progress on unemployment in year of low expectations

2020 is shaping up as a dismal year for the economy, with no progress on many of the key measures that matter for Australians.

Unemployment will stay above 5% and probably rise rather than fall.

Economic growth will continue to have a “1” in front of it, instead of the “2” or “3” that used to be common, and living standards will grow more slowly.

Wage growth, forecast in the budget to climb to 3%, will instead remain stuck near 2.2%, where it has been for half a decade.

Read more: We asked 13 economists how to fix things. All back the RBA governor over the treasurer

Those are the central forecasts of a panel of 24 leading economists from 15 universities in six states assembled by The Conversation to review the year ahead, a year they expect to be marked by one only more interest rate cut, more modest growth in house prices, and a return to slower growth in the share market.

The panel comprises macroeconomists, economic modellers, former Treasury, IMF, OECD, Reserve Bank and financial market economists, and a former member of the Reserve Bank board. Combined, their forecasts are more likely to be correct than those of any individual member. One-third are women.

They expect the long-promised budget surplus to all but disappear as a result of responses to the bushfires and weaker-than-predicted economic growth.

Economic growth

The Treasury believes the Australian economy is capable of growing at a sustained annual pace of 2.7%, but it hasn’t grown that fast since mid-2018. Growth slipped below 2% in March 2019 and hasn’t recovered. It now has been below 2% for three consecutive quarters, the longest period since the global financial crisis.

The panel’s central forecast is for economic growth to stay at or below 2% for at least another year, producing the longest period of low economic growth since the early 1990s recession. The average forecast for the year to December is 1.9%.

Panellist Saul Eslake says it will be the result of persistently slow growth in household disposable incomes, reflecting “very slow growth in real wages, the increasing proportion of gross income absorbed by tax, and weakness in property income (interest and rent) as well as (at the margin) the impact of the drought on farm incomes”.

It will be domestic rather than overseas conditions that hold back Australian growth. US economic growth is expected to remain little changed at 2.1% notwithstanding trade friction with China, and China’s officially reported growth is expected to ease back only slightly from 6% to 5.8%.

Living standards

One of the best measures of overall living standards (the one the Reserve Bank watches) is real net national disposable income per capita, which takes better account of buying power than gross domestic product does. In the year to September it climbed an unusual 3.3%, pushed up by a resurgence in iron ore export prices.

The iron ore price has since slid from US$120 a tonne to around US$90 a tonne, and the panel’s average forecast is for it to fall further.

As a result it expects growth in living standards to slow to 2.4% in 2020, a result that will still be better than between 2012 and 2016 when a dive in export prices sent it backwards.

Read more: Why we've the weakest economy since the global financial crisis, with few clear ways out

Growth in nominal GDP, the raw total unadjusted for inflation, is also expected to slow, slipping from 5.4% to 4.4% as export prices weaken, producing a decline in revenue growth the government has already factored in to the budget.

The unemployment rate is expected to end the year near the top of the 5%-to-5.5% band it has been stuck in for the past two years, rather than falling to the 5% forecast in the budget or towards the 4.5% the Reserve Bank believes is possible.

Only one of the panel, Warren Hogan, expects the unemployment rate to end the year below 5%.

Wages and prices

The panel’s central forecast is for inflation to remain below the bottom of the Reserve Bank’s 2-3% target band, where it has been for most of the past five years.

One panellist, Margaret McKenzie, breaks ranks. She expects the drought and bushfires and floods to sharply push up the cost of food and essential items including energy, quickly pushing inflation into the range the authorities have long wanted, but not for the reasons they wanted.

“I don’t think people have thought about it, because there hasn’t been inflation for so long,” she says. “The problem is that the fires are likely to contract an already weak economy, impelling the Reserve Bank to cut interest rates further, even though its inflation targeting regime would tell it not to.”

Wage growth is forecast to be well below the highest inflation forecast and only a little above the central forecast, resulting in continued low real wage growth and seeing the budget miss its wage growth target for the eighth year in a row.


Household spending barely grew in the year to September, inching ahead by a shockingly low 1.2%, the least since the financial crisis, and not enough to account for population growth.

The panel’s central forecast is for a recovery in spending growth to a still-low 2.4%, with spending held back by low consumer confidence and what former Organisation for Economic Co-operation and Development director Adrian Blundell-Wignall calls a “sense that we are living on borrowed time”.

Read more: GDP update: spending dips and saving soars as we stash rather than spend our tax cuts

“China is slowing, bank-financed housing has been pushing the envelope and is very expensive, and the governments have never had a plan for the next phase of sustainable growth,” he says. “This perception of no confidence in the government has not been helped by the bushfire events.”

There are few signs of a recovery in business investment, notwithstanding record-low interest rates.

The panel’s average forecast is for investment by mining and non-mining companies to grow by only 1.7% and 1.9% in 2020, which will represent a turnaround for mining, in which investment fell 11.2% in the year to September.


Financial markets should provide less support to households in the year ahead, with the ASX 200 share price index expected to climb only 6.4% after soaring 20% in the year just ended.

None of the panellists expect last year’s growth to continue.

The Australian dollar is expected to end the year at 68 US cents, close to where it is at present. The iron ore price is expected to fall to US$75, a smaller slide than was assumed in the budget.

Home prices

Housing investment (homebuilding) is expected to stabilise in 2020, falling only slightly from here on, after sliding 9.6% in the year to September 2019.

Sydney and Melbourne home prices are expected to continue to recover, growing by 5% in 2020.

Panellist Nigel Stapledon says the higher home prices will in time boost perceptions of wealth, opening up the possibility that consumer spending will “surprise on the upside”.

Interest rates and budget

The panel’s central forecast is for only one more cut in the Reserve Bank’s cash rate this year, in the first half, followed by no further cuts in the second half. This would allow the bank to avoid so-called unconventional monetary policy or “quantitative easing” in which it forces down longer-term rates by buying government and private bonds, an option Governor Philip Lowe said it would only resort to after it had cut its cash rate to 0.25%.

The single cut would take the cash rate to an all-time low of 0.5%. In anticipation the ANZ cut its online saver account rate from 0.1% to 0.05% on Thursday.

Read more: Now we know. The Reserve Bank has spelled out what it will do when rates approach zero

The cut could come as soon as next week when the board holds its first meeting for the year on February 4. Governor Lowe has scheduled an address to the National Press Club for the following day.

Most of the panel think quantitative easing will not be needed and many question its effectiveness, saying the government could achieve much more by fully abandoning its commitment to surplus in order to stimulate the economy.

The panel expects the government’s 10-year bond rate to remain historically low at 1.3%. That makes it about as cheap as it has ever been for the government to borrow for worthwhile purposes.

Treasurer Josh Frydenberg has abandoned his absolute commitment to return the budget to surplus this financial year, saying his first priority is “meeting the human cost of the bushfires”.

The 2019-20 surplus was forecast at A$7.1 billion in the May budget and then downgraded to $5 billion in the December update.

The panel’s average forecast is for a bushfire-ravaged $2.2 billion.

Most of the panel believe that with good management the government can avoid a recession for another two years, propelling the Australia economy into what will be its 30th straight year of expansion.

On average they assign a 27% probability to a recession within the next two years, down from their average forecast of 29% in June.

Several point out that, whereas the main risks to continued growth come from overseas, China appears to be managing its slowing economy better than expected, although the emergency triggered by the new and deadly Wuhan coronavirus might change that.

Read more: Their biggest challenge? Avoiding a recession

Among those who do fear a home-bred recession is Julie Toth who has lifted her estimate of the likelihood of a recession from 25% to 50%, saying growth is already so weak that it won’t take much to send it backwards.

“The bushfire disaster presents the real and immediate possibility of two quarters of negative growth for the fourth quarter of 2019 and the first quarter of of 2020,” she says.

“Even if disaster relief and fiscal stimulus are delivered swiftly, resource constraints (a lack of skilled tradespeople, water, equipment and appropriate building materials) mean reconstruction will be very slow.”

The panel began compiling its responses when the bushfires weren’t as bad as they subsequently became and before the emergence of the Wuhan coronavirus.

It delivered its final forecasts on January 20 when the worst of the bushfires appeared to have passed but before the coronavirus had spread to Australia.

The effects of both won’t be known for some time.

2020 is turning out to be a year of uncertainty, as well as low expectations.

The Conversation 2020 Forecasting Panel

Click on economist to see full profile.

Read more: Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, January 08, 2020

In fact, there's plenty we can do to make future fires less likely

One of the dominant ideas buzzing around the internet is that there’s little we can do to escape the prospect of more frequent and worse bushfires - ever.

That’s because there’s little we can do to slow or reverse the change in the climate.

Australia accounts for just 1.3% of global emissions. That’s much more than you would expect on the basis of our share of world’s population, which is 0.33%. But even if we stopped greenhouse gas emissions as soon as we could and started sucking carbon back in (as would be possible with reafforestation) it’d make little difference to total global emissions, which is what matters – or so the argument goes.

But this argument ignores the huge out-of-proportion power we have to influence other countries.

There’s no better indicator of that than in Ross Garnaut’s new book Super-power: Australia’s low-carbon opportunity.

We’re more important than we think

Garnaut conducted two climate change reviews for Australian governments, the first in 2008 for the state and Commonwealth governments, and the second in 2011 for the Gillard government.

In the second, he produced two projections of China’s emissions, based on what was known at the time.

One was “business as usual”, which showed continued very rapid increases. The other took into account China’s commitments at the just-completed 2010 United Nations Cancun climate change conference.

China’s annual emissions matter more than those of any other country – they account for 27% of the global total, which is a relatively new phenomenon.

The bulk of the industrial carbon dioxide already in the atmosphere was put there by the United States and the Soviet Union, who have been big emitters for much longer.

Egged on by the US Obama administration and by governments including Australia’s under Julia Gillard, China agreed at Cancun to slow its growth in emissions, and at the Paris talks in 2015 hardened this into a commitment to stabilise them by 2030.

The extraordinary graph

Garnaut’s 2011 projections showed growth moderating as a result of China’s commitment, which was at the time a cause for optimism.

When he returned to the numbers in 2019 to prepare his book, he was stunned. Egged on by the example of countries including the US and Australia, China had done far, far better than either “business as usual” or its Cancun commitments. Instead of continuing to grow rapidly, or less rapidly as China had said they would, they had almost stopped growing.

The graph, produced on page 29 of Garnaut’s book, is the most striking I have seen.

Since 2011, China’s emissions have been close to spirit-level flat. They climbed again only from 2017 when, under Trump in the US and various Coalition prime ministers in Australia, the moral pressure eased.

From the start of this century until 2011, China’s consumption of coal for electricity climbed at double-digit rates each year. From 2013 to 2016 (more than) every single bit of China’s extra electricity production came from non-emitting sources such as hydro, nuclear, wind and sun.

There are many potential explanations for the abrupt change. Pressure from nations including the US and Australia is only one.

What happened once could happen again

And there are many potential explanations for China’s return to form after Trump backslid on the Paris Agreement and Australia started quibbling about definitions. An easing of overseas pressure is only one.

But, however brief, the extraordinary pause gives us cause for hope.

Australia can matter, in part because it is hugely respected in international forums for its technical expertise in accounting for carbon emissions, and in part because of its special role as one of the world’s leading energy exporters.

Garnaut’s book is about something else – an enormous and lucrative opportunity for Australia to produce and export embedded energy sourced from wind and the sun at a cost and scale other nations won’t be able to match.

Read more: Australia could fall apart under climate change. But there's a way to avoid it

Some of it can be used to convert water into hydrogen. That can be used to turn what would otherwise be an intermittent power supply into a continuous one that enables around-the-clock production of the green steel, aluminium, and other zero-emission products Japan, Korea, the European Union and the United Kingdom are going to be demanding.

It’s a vision backed by Australia’s chief scientist.

It wouldn’t have been possible before. It has been made possible now by the extraordinary fall in the cost of solar and wind generation, and by something just as important – much lower global interest rates. Solar and wind generators cost money upfront but cost very little to operate. Interest rates are the cost of the money upfront.

At least three consortia are drawing up plans.

There’s not much to lose

There’s much that needs to be done, including establishing the right electricity transmission links. But Garnaut believes it can all be done within the government’s present emissions policy, helping it achieve its emission reduction targets along the way.

What’s relevant here is that moving to ultra-low emissions would do more. It could give us the kind of outsized international influence we are capable of. It could help us make a difference.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.