How increased spending support and cash rate at 0.25% would help the Australian economy

Summary

• RBA held its cash rate at 0.25% for this month as well, as discussed in the latest monetary policy meet, on 4 August.
• PM Scott Morrison will provide $1500 grant for Victorians to self-isolate, and without sick leaves entitlement in order to limit the spread of the virus in workplaces.
• RBA Governor Philip Lowe has asserted the need for the Australian government to step in and increase spending to support the economy.
• Dr Lowe stated that the Australian economy had passed the low point, but the recovery process will be uneven, and bumpy given COVID-19 second outbreak in Victoria.

The Reserve Bank of Australia (RBA) kept the official cash rate at 0.25% for the fifth consecutive month and reaffirmed the target yield on 3-year Australian government bonds at 25 basis points in its latest monetary policy meeting held on 4 August.

The RBA made the announcement of keeping the cash rate on hold and cautioned of an uneven recovery after factoring in the latest data from Victoria's spiralling infection rate crisis into the economic projections ahead.

Victoria's Premier called the area a "state of disaster" on 2 August, proposing more draconian shutdown initiatives to be taken ahead, enforcing a nightly curfew from 8 am to 5 pm for 6 weeks, and prohibiting nearly all recreational trips after the second-largest state in Australia reported 671 new infections in a single day (as on 2 August).

Daniel Andrews, Victorian Premier announced the curfew starting from 2 August to 13 September and moved Metropolitan Melbourne into stage 4 lockdown. Regional Victoria outside of metropolitan Melbourne was declared to be placed under stage 3 restrictions.

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As of 4 August 2020, the total number of coronavirus cases in Victoria stood at 12,335 and caused 147 deaths.

Source: Department of Health, Australian Government

Australia's Prime minister, Scott Morrison proposed a payout of $1,500 coronavirus disaster payment, on 3 August in Victoria for workforce in self-isolation for 14 days and without any paid sick leaves, a step taken to stop the spread of the virus in workplaces.

Further, the federal government is also preparing to subsidise childcare for the state to make sure centres stay open for the next 6 weeks amid lockdown.

Bumpy road ahead

Philip Lowe stated that even though the economy was witnessing the worst contraction in the past 90 years, the downturn is still not as severe as expected earlier, and recovery is happening in most of Australia. Also, the recovery is expected to be bumpy as coronavirus continues to ravage the state of Victoria.

RBA Board considered a range of scenarios during the meeting, given the uncertainty about the overall outlook. In the baseline scenario, the output is expected to shrink by 6% over 2020 and grow by 5% after that. While the unemployment rate is likely to increase to around 10% later in 2020 in the current scenario, as a result of further job losses in Victoria and more people looking for positions elsewhere in Australia. The unemployment rate is projected to decrease slowly to about 7% in the following couple of years.

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Dr Lowe also asserted the need for more fiscal and monetary stimulus given the bleak outlook of the economy and the labour market. He noted that there is an increasing need for the federal government to step in and do more heavy lifting. Further, the government's announcement on various income support measures to be extended is a welcome development and will back aggregate demand.

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He further mentioned that there is a likelihood of faster economy rebound in case of some improvements observed in containing the virus during the upcoming period. The improvements in virus containment would the build trust of households and companies towards expenditure and enhance their confidence.

He assured on RBA Board staying committed to supporting jobs, incomes, and businesses in Australia. Moreover, RBA actions are keeping funding costs down and helping in maintaining a smooth supply of credit to households and industry.

More spending support needed by government

Apart from RBA, IMF has urged the government to spend more in case of the second round of COVID-19 outbreak. Businesses are urging the government to give thousands of dollars as survival payments to them, and single traders in metropolitan Melbourne remain constrained by harsher restrictions.

IMF has cautioned that the economic fallout of the second coronavirus outbreak will have to be offset by the federal government, in a report on trade issues facing economies around the world.

KPMG reports that the Victorian lockout in August would result in $830 million in missed output with an estimated 130k workforce unemployed because they hold jobs like manufacturing and construction that cannot be done from home.

UBS has also forecasted that unemployment would hit 10% compared with an earlier 8% average forecast.

Dr Lowe stated that persistent support through JobKeeper and JobSeeker programs, which were recently extended in a scaled-back form would be required to support the economy. He also added that the Australian government is well-positioned to provide continued support. The government can borrow for 5 years at only 0.4% and for 10 years at 0.9% to meet the robust demand for government debt.

He noted that Australia entered the coronavirus pandemic with a very low public debt than other countries. Hence, the public balance sheet is well placed to smooth out the blows caused to private incomes and give some support to the economy amid the challenging times.