A Different Perspective on COVID-19 Pandemic, Taking Clues from History

Summary

• RBA is highly unlikely to go for negative interest rates and prefers purchasing more government bonds in case further stimulus is required.
• Consumer confidence and personal spending data are reviving hopes of sooner than expected economic recovery.
• The central bank does not expect economic downturn to be as severe as was earlier expected but emphasize fiscal stimulus to remain robust.

Negative interest rates in Australia is extraordinary unlikely, said the RBA Governor, Mr Philip Lowe during questioning before the Senate Select Committee on COVID-19. Mr Lowe has further assured Australians that negative interest rates is not on their policy agenda and RBA would prefer buying more government bonds if further stimulus is needed.

In his opening statement to the Senate Committee, he highlighted that there has been a close coordination between fiscal and monetary policy during COVID-19 pandemic, with RBA contributing via a comprehensive package in mid-March. The central bank also processed millions of dollars to households and businesses in government assistance, besides ensuring the smooth operation of the payments system and maintaining banknote supply.

He emphasized that their mid-March package has worked in line with expectations, building the required bridge to recovery; however, the shape and timing of economic recovery would depend on lifting of restrictions and the restoration of confidence.

Having said that, let us discuss some economic indicators that are reviving hopes of sooner than expected economic recovery:

Consumer Confidence Lifts for Eighth Straight Week

The latest ANZ-Roy Morgan Consumer Confidence survey revealed that consumer confidence improved for the eighth straight week in Australia, surging 42 per cent from its low point in March (65.3), when pandemic-related fears were the highest.

The consumer confidence increased by 0.4 per cent to 92.7, supported by a recovery in the job market and government measures. Additionally, the survey reported that about 23 per cent of Australians believe that they are better off financially at present in comparison to the same time last year. However, around 36 per cent accepted that they are financially worse.

However, the expectations for future economic outlook declined in the survey, possibly due to Australia-China trade concerns owing to the imposition of 80 per cent tariff on barley imports by China, weak retail sales that fell 17.9 per cent in April 2020 and Fitch’s latest revision of Australian outlook from stable to negative.

Personal Spending Recovering in Australia

Commonwealth Bank of Australia (ASX:CBA) and Australia and New Zealand Banking Group Limited (ASX:ANZ) recently released weekly data on personal spending, which demonstrated a surge in consumer spending for the week to 22^nd May 2020.

ANZ data revealed that debit and credit card spending was up by 2.2 per cent year on year during the week, while CBA statistics indicated a year-on-year rise of 4 per cent. As per ANZ data, Western Australia consumers lead in spending, marking a 12 per cent increase over the same period last year.

The personal spending has begun to gather momentum as consumers head back to shopping malls with the advent of winter.

However, ANZ notified that the rise in card use might be due to the usual travel budget instead of an actual rise in total spending. CBA also noted that the personal spending is still running below the level it was prior to coronavirus hit in January.

RBA Expects Economic Downturn to be Less Severe than Previously Anticipated

RBA Governor does not anticipate probable economic downturn to be as severe as was earlier feared on the back of better than expected national health outcomes. Besides, he suggested that there is no need for government to spend more than it planned on JobKeeper program.

Notably, Australia has so far recorded just over 7,100 coronavirus cases and 103 deaths, which are significantly lower than other developed countries of the world. Besides, the nation has been able to contain the virus, bringing new infections under control across different states and territories.

Considering the current state of the economy, Mr Lowe has emphasized that fiscal stimulus needs to remain strong and should not be withdrawal too early to prevent devastating effects on economy. Against this backdrop, he expects government stimulus to remain for a long period of time.

Although RBA sees Australia in a better economic state than was earlier forecasted, the central bank expects a shadow cast by the pandemic even as the revival gets underway. The bank believes a reform agenda making the nation a better place to invest, expand, innovate and hire people would surely help to move out of this shadow.