The RBA, like the rest of us, is flying blind in 2021

2020 turned out to be reasonably predictable - far more predictable than 2021.

2020 turned out to be reasonably predictable - far more predictable than 2021. (Photo by Sebastien SALOM-GOMIS / AFP)

It does not seem to be widely understood that 2020 turned out to be actually reasonably predictable — and, of more immediate relevance, far more predictable than 2021 is.

By “turned out”, I mean by around end-March, once we knew what was happening with the virus, and even more the responses of governments and central banks, here and right around the world — broadly, government-mandated recessions and massive countervailing monetary and fiscal stimulus.

Certainly, 2020 had been totally unpredictable and obviously literally unpredicted, pre-virus, back at the end of 2019. Or, indeed, even into February 2020, as Reserve Bank governor Philip Lowe crisply spelt out in his speech to the National Press Club midweek.

Since my previous address last February, “a pandemic, the biggest contraction in output in generations, the closure of our borders, a very large fiscal stimulus, near-zero interest rates and quantitative easing. All that in just a year and none of it was predicted,” Lowe said.

Quite. But one thing he did not identify as both happening and being unpredicted was that the “biggest contraction in output in generations” was directly ordered by governments state and federal in combination through the national cabinet. Never before has a government in Australia ordered businesses to close and ordered jobs to be destroyed across the economy, outside specific one-offs on, say, environmental grounds.

I draw attention to this not as a criticism or to reignite the (fatuous and offensive) “money-versus lives” accusation in debating lockdowns, but to keep making the point that the virus didn’t do it, governments did.

The recession, here and everywhere, didn’t just “happen” like some natural disaster; it came as a direct consequence of entirely legitimate but also legitimately debatable discrete policy decisions.

It’s important to keep making the point. Just as the government ordered us into recession, we could not emerge from recession until the government ordered us out, specifically from lockdown. All the stimulus could not override the initial order or substitute for the counter order.

The “order” also imposed on government a moral governance responsibility to provide the range of assistance, of which the biggest and most important was JobKeeper, at least equal to the macro-economic policy imperative for the spending.

In sum, once we essentially knew what we were dealing with in terms of the virus and what we knew was the policy response — the mandated lockdowns and the fiscal and monetary stimulus — 2020 became rather more predictable than most years.

That GDP would plunge in the June quarter. It would then surge in the September quarter, albeit with the surge moderated by Victoria’s decision to throw a quarter of the national economy back into recession; but that then worked to supercharge the December quarter nationally.

The RBA now “predicts” that all that will have brought GDP in the December quarter back within 2 per cent of where it was pre-virus in the December quarter 2019, as against the 4 per cent shortfall it was expecting last November.

Nothing of substance rides on this, and it is certainly not impacting on its policy decisions, but I suggest the RBA will have been too pessimistic — that December quarter 2020 GDP will be back almost on par with December quarter 2019, and could even slightly top it. The ABS will tell us in a month.

Once March had ticked out, the global and local investment scenes were more predictable than in most years; which did not necessarily mean they would be accurately predicted. Asset values — property and already overvalued and more liquid shares — would plunge, and then spring back in consequence of the zero rates and multi-trillion-dollar money printing.

Consider how much more unpredictable 2021 is right now. Everything, and I mean everything, turns on the Godot vaccine — plus, in the local context, the end of JobKeeper at the end of March. Come April Fool’s Day, some 1.5 million jobs — one-in-six in the private sector — and the businesses behind them will be on their own. Or, we will get a “surprise extension”, or some similar program targeted to specific sectors such as tourism.

I make no prediction; I point only to the unpredictability that flows from the “waiting for” and the uncertainty swirling around the consequences of the Godot vaccine; and why it would be very dangerous to assume that we — and the world — are now on an assured path out of the nightmare.

That’s the downside unpredictability. The upside unpredictability is the vaccine working quickly and sustainably in terms of, obviously, health outcomes but also with economic effectiveness by, broadly, avoiding lockdowns and opening borders.

In that outcome, we face a supercharged 2021, of which the December-quarter “Victoria surge” provides a pointer. The economy would be “ordered back to work” with still massive monetary stimulus and still-significant, if not so-massive, fiscal stimulus.

This “unknown known” — ie, whether the vaccine works and how quickly — makes it unwise, and indeed simply undoable, to try to predict the RBA’s policy mix beyond its commitment not to hike its official rate for “at least three years”.

Everything else – the three-year yield target, the QE beyond this second $100bn, and the all-but zero interest money for the banks – remains “on the table”, hostage to what happens over the next two months, and what might be in store beyond that.

I stress “hike” because it remains possible, but unlikely, that the RBA could be dragged, just as it was to cut the rate structure to zero, actually into the negative if the world turned seriously dark.

Yes, Lowe said midweek that “the board has no appetite to go into negative territory”.

Yes, he clearly expects to “do what’s needed” with QE.

But then, he never expected to do what the RBA’s been doing over the past 12 months.