Australia has not had a recession – formally defined as two consecutive quarters of negative GDP growth or negative growth in annual terms – since the early 1990’s.
However, there is ample evidence that the economy is weak.
GDP per capita, consumer spending per capita and private domestic demand have all contracted over the year. In terms of how the economy might “feel” to households, in particular, these measures certainly point to a downbeat economic climate.
But this is not a recession with the associated extreme pain for households, businesses, and institutions, as experienced in the early 1990s, and 1974 and 1982-83 before that. For example, the unemployment rate lifted to 11 per cent from 6 per cent in prior recessions, whereas in this period of slow growth, unemployment rate has remained around 5.2 per cent.
Today, we have learnt a lot and have much more flexible policies to avoid the problems of the past.
Fiscal policy has considerable scope to act quickly if the recession signals strengthen; there will be a budget surplus in 2019/20 and debt to GDP ratio at the Federal level is low. Admittedly, the government is cautious to use fiscal policy at this stage, but were an economic emergency to develop, the fiscal scope is available and the lessons of the past would counsel a decisive response.
As for the Reserve Bank, it is true that there is limited further scope to provide more policy stimulus but it will not, as was the case in the early 1990’s, exacerbate the issues with a policy mistake.
Westpac continues to predict cuts in the cash rate of 25 basis points in both October and February next year.
This week’s minutes of the RBA Board meeting for September make a fairly clear case for another rate cut in 2019.
With two meetings now having passed since the last move and, most importantly, the key rate cut theme that “the Australian economy could sustain lower rates of unemployment and underemployment” returning to the narrative, our central view that there is no reason to wait until November for the next move still seems reasonable.
Beyond that, the RBA may consider the use of unconventional monetary policy if needed. We think negative interest rates are highly unlikely given the pain caused on banks when used elsewhere. Another option would be providing cheap long-term funding to banks, which has worked well in the UK, but it also seems unlikely. The RBA could also adopt “quantitative easing”, or purchasing of other assets such as government bonds, to bring down private sector borrowing rates beyond what could be achieved by rate cuts.
Other options exist, setting up a very interesting outlook for potential policy movements domestically and globally.
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