From CBA Economics
Key Points:
- The Commonwealth government last week delivered a fiscal stimulus of $A17.6bn to boost demand in the economy.
- The government also announced measures that while important to support the health of Australians, will have a contractionary impact on spending in the economy.■
- Monetary policy still has a big role to play and more RBA easing is imminent.
The outbreak of COVID‑19 in Australia has left the Commonwealth and State governments in a position of trying to solve two objectives simultaneously: (i) slow the increase in the number of new cases, given community transmission in Australia is increasing; and (ii) limit the rise in unemployment and fall in economic activity caused by COVID‑19. This is an incredibly hard and delicate task because these objectives are in many ways competing. Slowing the rate of new infections results in less economic activity in the short run. On the other hand, more spending, particularly on services, boosts economic activity but will result in a faster rate of transmission.
This makes the policy process very challenging. Australia is not alone here with policymakers all around the world grappling with the task of keeping their economies afloat while limiting the spread of infection. The policy decisions of the Commonwealth government last week highlight the delicate balancing act.
On Thursday 12 March the government unveiled its highly anticipated fiscal stimulus package (see here). The $A17.6bn package is front loaded. More than half of the stimulus ($A11bn) will hit the economy in Q2 20 (equivalent to a very solid 2.2% of quarterly GDP). The aim of the package, particularly in the near term, is to support spending and to keep unemployment from rising. We commented at the time that it was effective and timely policy that will make a positive impact on demand in the economy. It was unambiguously stimulatory and the policy objective is all about supporting the activity side of the economy.
The following day, on Friday 13 March, the government gave public advice against holding non‑essential, organised public gatherings of more than 500 people from Monday 16th March. The objective is to reduce community transmission of COVID‑19. It will result in the cancellation or postponement of concerts, sporting events, festivals, shows, conferences and a range of other things where people are gathered in large numbers. This means less economic activity than would otherwise be the case – both directly and indirectly. In a similar vein the government has travel bans on travellers from Italy, South Korea, Iran and China – regions where the infection rate is highest. And over the weekend the government announced that anyone who arrives into the country from overseas must now self‑isolate for 14 days.
The objective is clearly to limit the spread of COVID‑19, but this brings about an economic cost to our tourism and education industries in particular. Our latest Household Spending Intensions (HSI) data has captured this impact to February (see chart opposite). To be clear, we are not questioning the travel bans or advice against public gatherings. We are simply highlighting that there is an impact on activity from the decisions taken to slow the spread of COVID‑19.
It is hard to think of a similar situation in recent memory where the Government has been faced with a medical and economic shock at the same time. The Global Financial Crisis was a monumental financial market and economic shock. But in many ways the policy response was straight forward because there was essentially only one objective – stimulate the economy. The situation today is far more complicated as demonstrated by the various announcements made last week. We saw a suite of policies to both boost economic activity and shrink it over a two‑day period. If the Government announces further measures to restrict economic and social activity, for example the closing of schools and universities, then there will be pressure to deliver more fiscal stimulus. Ultimately a hit to economic activity is an inevitable consequence of slowing the rate of transmission of COVID‑19. With this in mind, additional policies that are targeted to keep people employed and limit the rise in unemployment are probably the most appropriate type if more fiscal stimulus is required.
The delicate nature of the problem and dual health and economic objectives is why we believe that monetary policy still has a big role to play. We expect the RBA to take the cash rate to the effective lower bound of 0.25% at the April Board meeting. There is a risk that the RBA cuts the cash rate before the April Board meeting (some other central banks have eased policy before their board meetings due to COVID‑19). Quantitative easing, in the form of yield curve control, is expected to arrive after the RBA has cut to the lower bound (see here for our more detailed thoughts on the RBA).
