It is not only the beleaguered tourism and education sectors that have their hands out seeking targeted government funds. The pain is being felt across the economy from issues like broken global supply chains and an element of raw panic among consumers, like those in Australia who stripped supermarket shelves of toilet paper this week in frenzied stockpiling.
Mr Frydenberg needs to be both tactical and structural in confronting the virus threat that the Department of Treasury last week said would strip “at least” 0.5 percentage points off Australia’s economic growth in the first quarter.
And that estimate only reflects the measurable hit to tourism and education, Treasury secretary Steven Kennedy told parliament.
“It doesn’t include supply-chain disruptions or other potential broader impacts,” he said.
There is therefore plenty of scope for the hit to growth to be much bigger. Discussion between key economic policy makers has shifted from chatter about a “V-shaped” recovery from the virus –— similar to that after the 2003 SARS outbreak — to a “U-shaped” one. That is code for ‘‘this crisis is going to take a lot longer to shake off than first thought’’. The longer the disruption goes on, the more the word “recession” will be bandied about in Australia. To be sure, it is already on many people’s lips.
“Australia’s economy is likely to shrink in the first quarter and another decline in the second quarter is a real possibility. Containment of the virus in the very near future seems, unfortunately, increasingly unlikely,” said David Plank, ANZ’s head of Australian economics.
It has been nearly 30 years since a job-destroying recession rolled over the nation’s economy. So it makes sense for Mr Frydenberg to throw at least some of his trademark caution to the wind when he presents details of the stimulus package. The tactical elements of the package should be mixed with structural changes.
Westpac chief economist Bill Evans said the government should bring already-legislated income tax cuts forward. Structural improvements to the tax system were well overdue, he said.
Among the weaker parts of the economy is consumer spending, which is in part linked to a rising tax take on households. Now is the time for the government to reverse that.
The bulk of the fiscal stimulus will need to be deployed quickly. A drip feed of funding in the face of what is the biggest threat to the economy since the global financial crisis just won’t cut it. Mr Frydenberg spends a lot of time criticising the huge fiscal stimulus that was deployed after the collapse of Lehman Brothers in September 2008. To be sure, some of the government spending then was frenzied and poorly designed. But the Aussie economy avoided recession when many others didn’t and unemployment peaked at less that 6 per cent — outcomes that should be lauded.
Shane Oliver, chief economist at AMP Capital, said the government might need to fire off $20bn of stimulus, equivalent to 1 per cent of GDP, to make any real difference.
“The first priority is to help industries being hit hard, in particular to mitigate potential business insolvencies,” he said.
Tax breaks for new investment would help, while GFC-style payments to individuals should also be on the table, Dr Oliver said.
The Reserve Bank is also positioning itself to do more.
It cut its cash rate to a record low last Tuesday and looks set to deliver a second reduction in April.
Beyond that it will quickly start to prepare markets for the rollout of alternative policy measures. RBA governor Philip Lowe last year pointed to the likelihood that the central bank would start buying government bonds if it became needed, to put downward pressure on the yield curve.
That remains the objective but the RBA is hoping it can get the same result without having to spend a cent via yield curve control. This entails the RBA merely saying it would like government bond prices to be at certain level, a process similar to that being used by the Bank of Japan.
Financial markets understand the RBA has the firepower to engineer change in bond yields, and so won’t stand in the way. At least that’s what the RBA is hoping for.
Success would be a 15 basis point drop in certain parts of the yield of the yield curve to support the economy.
If the coronavirus continues to sharply slow Australia’s economy and Mr Frydenberg’s fiscal stimulus proves too meek, the RBA could resort to yield curve control in the next months.
James Glynn is the Australian economics correspondent with The Wall Street Journal
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