Philip Lowe: 5 reasons to stay ‘fundamentally optimistic’ on Australia

Summary

• Australia has now lifted restrictions that were imposed due to coronavirus outbreak much earlier than expected, but the risk of second wave of COVID-19, job losses and weakening trade ties with China pose threats for the economy.
• Lately, RBA Governor revised his employment estimate, with hours worked now expected in Australia to fall by 10% from the previous estimate of 20%.
• RBA Governor Philip Lowe is encouraged by government’s JobMaker plan and fast-tracking of infrastructure projects.
• Lowe stated that surging Australian dollar is not a problem for the economy and asserted that interest rates are likely to remain low for few years.

Australia flattened the coronavirus curve earlier than was anticipated, with the economic contraction not as severe as projected. Also, the country stands at a much better position than its global counterparts.

RBA Governor Philip Lowe, while speaking on global economy and COVID-19 in a webinar stated that the economy is benefitting from the way the government has tackled and responded to coronavirus pandemic. As on 23 June, COVID-19 has caused 102 deaths in the country, which is less when compared to hundred thousand deaths from the virus in other nations. The lesser number of death toll allowed the government to ease restrictions after 3 months, to uplift the economy.

However, the resurgence of the virus in Beijing, recently, can pose significant risks to Australian economic recovery. Further, the contraction in the economy due to COVID-19 has resulted in a rise of unemployment rate to 7.1% in May, with a total loss of 835,000 jobs since March. Though the job loss was relatively suppressed due to low participation rates, and JobKeeper wage subsidies that supported about 3 million Australians. There is considerable uncertainty about handling the situation when JobKeeper ends in September as several businesses are relying on wage subsidy to stay afloat.

As per IMF, Australian economy is expected to shrink by 6.7% in 2020.

Australian economy also stands at risk of losing China as its trading partner altogether, as China applied trade restrictions like high tariffs on Australian barley, banning of beef exports and discouraging Chinese students and citizens from studying or travelling in Australia. These restrictions followed post Australia ordered an inquiry on coronavirus origins in China.

Hence, the country must take measures to reduce dependence on China. Recently, trade talks started between the UK and Australia to enhance its trade relations beyond China.

There are a few rationales to remain positive about Australian economy. Philip Lowe, RBA Governor, stated 5 reasons to be hopeful on the country and are as following:

1. Hopes for recovery in jobs

The unemployment rate rose to 7.1% for May, as per latest data released by ABS. However, the numbers could have been much higher if JobKeeper and JobSeeker policies were not implemented by the government. The ABS data also showed that the fall in hours worked has slowed down considerably, with hours worked reducing by only 0.7% between April and May, from an earlier slump of 9.5% between March and April.

Lately, RBA Governor revised his estimate of hours worked to fall by about 10%, which were expected to fall by about 20%, a few months ago.

As Australia lifted its lockdown measures and reopened the economy, 3 weeks ago; job gains are expected as workers re-join, and offices reopen. SEEK employment figures suggest that job ads have increased 39.7% month-on-month, while payroll jobs rose by 1% in May, increasing 0.4% in second week of June.

2. Morrison’s step on infrastructure and deregulation

During mid-June, Prime Minister Scott Morrison unveiled an economic plan to lift the nation, currently crippled due to coronavirus. He committed to fast-track investment in critical infrastructure projects including Inland Rail, Marinus Link, Olympic Dam extension, Emergency town water projects in New South Wales and Rail, road and iron ore projects in Western Australia, as part of the new JobMaker plan. Under the program, 5 working groups have been formed to look at industrial relations reforms created to help coronavirus recovery.

He committed AU$1.5 billion in federal funding to secure jobs and announced that investment in infrastructure and deregulation would play an important role in the 5-year JobMaker plan. He also stated to add greater power to the industry in overhauling skills and training systems to stimulate creations of jobs.

RBA Governor appreciated the government’s move in strengthening industrial relations, infrastructure, and the need for reducing regulation. He added that there was a need for advances in technology and policy reforms; otherwise, the economy would go on with slow growth and witness slow growth in income as well.

3. Australian dollar surge

The Australian dollar has soared about 24% since AUD/USD hit the low at USD 0.5510 on 19 March. On June 22, AUD/USD settled at USD 6907, up by 1.28%. The uptick arose due to positive sentiment across global equity markets, which benefitted the seeming riskier AUD. The financial markets have stayed resilient to a rise in the number of new coronavirus cases in a few countries, including the US.

Lowe stated that the appreciation of the dollar was not a problem at this point of time, and it was hard to argue that AU$ is overvalued though he added that a lower exchange rate would support the economy more.

On 23 June, at the time of writing, AUD/USD was trading at USD 0.6919, up by 0.18%.

4. Rise in spending

The economy is now bouncing back with a rise in spending. Data from illion and AlphaBeta showed that spending on restaurants is 20% more than pre-COVID levels due to rise in demand for food delivery, while expending on cafes is also back to pre-COVID levels. There has also been a rise in increased weekend spending coming from people getting JobKeeper subsidies and other stimulus payments.

Further, Dr Lowe stated that the government could not keep borrowing money to overcome mediocre economic growth and keep supporting people through its stimulus payments.

5. Low-interest rates

RBA has taken several measures to support the growth of Australian economy. The central bank in its latest monetary policy meeting stated that it had set the target for the cash rate at 0.25% and a target of 25 bps for the yield on 3-year Australian Government bonds, which would be maintained until the economy makes some progress in the direction of full employment and inflation target.

The bank has also started with the Term Funding Facility to boost credit to companies. RBA Board acknowledged that organised, significant and unparalleled easing of financial and monetary policy would help the economy sail through the current challenging times. The bank’s actions have been maintaining funding costs low and ensuring smooth credit flow to both households and businesses.

Lowe stated in the webinar that interest rates are likely to hold at same levels for few years given the prevailing disinflationary environment. He also added that the bank is still prepared to do whatever it takes on policy to boost growth, jobs, and inflation.