In contrast, private sector spending is likely to remain under pressure over the next year. Household consumption will be weighed down by the winding back of government payments to households (as the JobKeeper and JobSeeker levels fall), a weak labour market and ongoing caution about both the health and economic outlook. Similarly, businesses will remain unwilling to invest and hire until the path for the economy looks clearer.
Supportive policy to remain
There are clearly crucial differences between the current recession and those of the early 1980s and 1990s. The current one was caused by the response to a health crisis rather than higher interest rates flowing from an economy that was overheating. The policy response has been faster and much larger than even that which followed the Global Financial Crisis (GFC). The monetary policy response has, however, been more moderate. This reflects the starting point of already very low interest rates rather than any sense of complacency by the Reserve Bank of Australia (RBA).
These differences mean ANZ Research needs to be cautious about drawing too many lessons from past events. Even so, ANZ Research believes one of the takeaways from the last two recessions and the GFC – that it takes many years for the labour market to recover – will apply this time too.
With that in mind, ANZ Research thinks it imperative that policy remains stimulatory for an extended period. If ANZ Research’s outlook proves to be too cautious then this will be a good problem to have, with policy able to tightened if activity recovers faster than expected. ANZ Research sees little risk of such an approach causing a lasting breakout of inflation that will take years to contain.
When thinking about the economic and social costs of high unemployment, ANZ Research thinks the bigger mistake would be to withdraw stimulus too early. Certainly ANZ Research doesn’t think there is any need to do so over concern about an approaching constraint on government debt.
In this environment, ANZ Research expects there will be much lobbying for government support. It is vital, however, that appeals for more government spending (or regulatory intervention, for that matter) continue to be subject to rigorous analysis to ensure that the government gets the best bang for its buck, maximises the fiscal multiplier and the long-term prospects for Australia.
Fiscal settings will be critical in determining the timing and extent of any further policy steps by the RBA. The RBA’s approach is to take existing fiscal settings for its forecasts rather than try to build in possible changes. This is understandable. Having the RBA include possible changes in fiscal policy in its forecasts could be interpreted as an attempt to intrude directly into the policy development process. It does mean, however, that when fiscal settings change materially, the RBA’s forecasts can become out of step with what is happening.
If ANZ Research is close to being right on the size and scope of fiscal developments in the coming federal and state budgets, then this fate will befall the RBA’s August forecast update. At the very least, the RBA will want to incorporate as much of the new fiscal settings into its forecasts before it considers taking any further policy steps itself. This makes a policy change in October very unlikely, in ANZ Research’s view.
What’s more, ANZ Research thinks the fiscal measures will be large enough to push the RBA to the sidelines for some time. The thinking at this stage is that the RBA won’t seriously consider further moves until May 2021.
It won’t just be fiscal policy that matters for the RBA, to be fair. The data will also be critical. In particular, developments in the labour market. Much weaker than expected employment data could see the RBA reaching into its (limited) policy tool box earlier than this. Global developments will also matter, not least what other central banks are doing.
But the RBA expectations for employment over the rest of this year are already quite negative. In the August Statement on Monetary Policy, the RBA forecast by the end of the year the unemployment rate would hit 10 per cent and employment would have contracted by 6 per cent year-on-year. This implies it expects substantial employment losses over the second half of 2020, such that employment could approach the low point recorded in May when most of the country was still under tight restrictions.
This reduces the prospect of the RBA being surprised to the downside, which reinforces ANZ Research’s view Australia is in for a period of stability on the monetary policy front – assuming, critically, the judgement ANZ Research is making about fiscal settings is broadly right.
Felicity Emmett is Senior Economist and David Plank is Head of Australian Economics at ANZ