Policy Options Heading into Uncharted Waters- April 2020
Following RBA governor Philip Lowe’s speech last Tuesday, Westpac has anticipated that the cash rate will remain on hold until December of 2023. The central bank’s statements have offered some forward guidance for Australia’s economic outlook, which has remained consistent with predictions made by commercial banks. Westpac identifies a 9.5% contraction in the first half of 2020, an increase in the unemployment rate to 9%, and a second half bounce back by 4-5% as likely short-term outcomes of the novel coronavirus. However, there is widespread recognition that monetary policy, especially at its lower-bound, is insufficient in stabilising Australia’s economic woes.
In similar news, the Federal Reserve has also kept rates near zero in recognition of “considerable risks” facing the US economy in the medium-term. With the number of confirmed COVID-19 cases breaching 1 million the past week, and countrywide shutdowns of industry and commerce weighing heavily on unemployment claims (26 million), the Fed is committed to using its “full range of tools” to achieve its objectives of full employment and price stability.
Westpac further identifies spare capacity within the labour market, effects on permanent immigration and employment-intensive sectors in education and health as some of the worst affected by the ongoing crisis. An expansionary fiscal stance is seen as necessary, which may mean delaying the government’s much desired budget surplus by a few years. Growth-oriented fiscal policies, such as personal tax cuts, are key to expediting Australia’s economic recovery, even if it comes at the expense of our much gilded AAA credit rating.
Moving forward, the economic rigidities we’ve seen arise from the crisis have galvanised a new appetite for reform. Productivity proposals for a broadening of the GST, labour market reform, fast-tracked infrastructure and deregulation are back on the table in a bid to strengthen Australia’s policy framework to handle the challenges ahead. The government’s pro-business agenda can be seen as a core focus for growth, primarily due to its importance in accelerating job creation, investment and living standards.