Australia’s economic bounce back from Covid-19 starts with spending

Reserve Bank Governor Philip Lowe at the Economics Standing Committee last week. Picture: NCA NewsWire / Gary Ramage

Look at the misery COVID is inflicting on the rest of the world. The task for business in 2021 is use the precious opportunity that Australia’s handling of the pandemic presents, otherwise, what is all this splendid isolation for?

As one top 20 company director put it, “it’s just us and North Korea who now prevent their population from leaving the country”.

Productive business investment must take over from government stimulus if we are to create new jobs, increase wages, pay down debt and get out of this mess. To make that investment decision, boards and business leaders have to position their companies for changing monetary and fiscal settings and government intervention.

Looking back, the V-shaped recovery seems obvious. Unlike others, this recession was government-imposed by border shutdowns and then banished by reopening and stimulus. Boards will be looking carefully at New Zealand where in the December quarter there was a 19 per cent growth in job ads, almost back to pre-pandemic levels.

The withdrawal of the federal government’s flagship stimulus, JobKeeper, in late March will follow a so-far-so-good company results season, albeit with cautious outlooks. There is still a big chunk of the $250bn stimulus money to be spent, and a federal budget in May, just over four weeks later, to make adjustments.

The RBA board’s signal that it will not raise the cash rate of 0.1 per cent before 2024, a three-year freeze, is at least in part to build confidence. Speaking to the Economics Standing Committee on Friday, Governor Phil Lowe described an elevated appetite to save and a depressed appetite to invest in Australia.

“As with most things — and here we’re talking interest rates — the price is mainly determined by supply and demand.

“There’s a big supply of savings and not very much demand for using those savings by firms wanting to invest. So, while ever that remains the case, we are going to have lower interest rates.”

The recent rise in property prices and the onward march of the stockmarket does not concern the governor, at least for now. Indeed in the US, Federal Reserve chairman Jerome Powell, during the latest Redditor-inspired rally on Wall Street, described the stockmarket as being driven by hope of vaccines and more fiscal stimulus, not the historic low rates.

“If you look at what’s really been driving asset prices, really in the last couple of months it isn’t monetary policy,” Powell said.

“The connection between low interest rates and asset values is probably something that’s not as tight as people think.”

If true, we’ve come a long way from the “Greenspan put” in the early nineties, monetary intervention which helped to sustain the stockmarket bubble of that time.

The RBA decision to extend QE and buy a further $100bn in bonds, and the expectation that this process will continue, is important for companies for a couple of reasons.

First, as the governor explained, the bank is lowering the cost of finance for government and for all borrowers by keeping a lid on 10-year bond rates, as the yield curve rises with signs of recovery. Second, his move is to support the competitiveness of our exporters: to keep in check the Australian dollar, which has been lifted by commodity prices and a weak US dollar. Lowe says that he will not lift the cash rate until unemployment falls (to about 4.5 per cent), which in the central bank’s scenario will not be until 2024.

The rate is still higher now than it has been for almost two decades, he argues, and people cannot get the hours that they want.

“The level of output is still around 4 per cent below where we thought it would be when this committee met in February last year. Four per cent is a big gap and it represents a lot of lost output and a lot of lost national income.”

Treasurer Josh Frydenberg has indicated that the government may move towards debt reduction somewhat earlier than 2024, once unemployment falls comfortably below 6 per cent. This creates an interesting dynamic.

Real wages growth for Australians is proving extremely difficult. The governor expects wages growth to remain below 2 per cent at the end of 2022 when inflation would be 1.5 per cent, still well below its target 2-3 per cent range. Even before COVID, it was clear that a jobless rate of 5 per cent could not deliver the promised wages growth expected by the old Phillips curve.

The governor told the Economics Standing Committee that “significant monetary policy support will be needed in Australia for some time to come”, but should boards consider a faster bounce back? Is it just possible that we could do better than even the RBA’s upside scenario?

“It’s possible,” said Lowe. “We have done, over the past six months, at least as good as our upside scenario and in some areas we have done better than the upside scenario, particularly on the unemployment rate. It’s possible that that will continue.

“If everything goes right on the vaccine front, confidence recovers very quickly, people decide to spend a lot of the extra savings they have accumulated over the past year, the global economy recovers quickly, there’s a big fiscal response in the US, some of the global trade tensions dissipate — if all those things go right, it’s possible. Wages growth in Australia picks up more quickly and we could be considering an adjustment in interest rates. But that’s not the upside scenario, that’s better than the upside scenario. It might happen — unlikely, I think.”

Since COVID hit, the Australian boardroom has changed. Meetings are shorter but more frequent, most still virtual or a hybrid of face-to-face and Zoom.

Subcommittee work is in overdrive dealing with changes — working from home, technology, and, of course, new risk.

There are very difficult questions to come. How to encourage more consumer spending? The lockdowns and working from home led to spending on renovations, whitegoods and electronics, but these are unlike recurring expenditures. With the government retreating from its reform agenda, where will the increased productivity come from to deliver a real wage increase? How much government intervention or regulation is coming?

The proposed removal of responsible lending laws is welcomed by the banks, but what will be the response if the property market becomes unstable?

Globally, the vaccine story has yet to play out. If effective enough for international borders to be lifted, then Australia’s success will have been in saving lives in the past 12 months.

If virus mutations run ahead of vaccines, then Australia’s splendid isolation will be blessing and a curse. That risk occupies minds on all company risk subcommittees.