Glynn’s Take: RBA stimulus to spur pace of recovery in Australia

The move comes at a moment when the ailing patient’s vital signs are already looking much stronger. Picture: NCA NewsWire / Jeremy Piper

What’s most notable about the Reserve Bank of Australia’s decision on Tuesday to pump more monetary-policy adrenaline into the veins of the Australian economy is that it comes at a moment when the ailing patient’s vital signs are already looking much stronger.

The central bank has now cut interest rates to as low as they are likely to ever go and said it will buy 100 billion Australian dollars (US$70.57 billion) more of government bonds, something that should help to lower the cost of borrowing money for banks, mortgage holders and businesses, while lowering the Australian dollar.

RBA Gov. Philip Lowe said the cut to interest rates and the unprecedented embrace of quantitative easing wasn’t to help push back on a further catastrophic cratering of growth in the second half of this year, but to lubricate the recovery that has become increasingly visible across the economy.

“It now appears probable that GDP increased solidly in the third quarter despite the lockdown in Victoria,” Mr. Lowe said. A return to growth in the quarter would technically end the country’s first recession in nearly 30 years. Confirmation won’t come until next month when official data is published.

Mr. Lowe also announced sharp upward revisions to forecasts for GDP growth, saying the Australian economy would grow by a stunning 6% in the year to June 2021, well above the bank’s forecast of 4% published just three months ago.

The RBA also expects unemployment to peak at “a little under 8%,” well below its earlier forecast of 10%.

It’s not an understatement to say that if Australia can emerge from its worst economic crisis in a century with a peak in unemployment that is in the single digits, this will greatly relieve economic policy makers, many of whom feared jobless numbers closer to 20% when the Covid-19 pandemic first arrived in the country.

Such an outcome would also be testament to the cohesion that exists between key economic institutions like the RBA, the Department of Treasury in Canberra, the Treasurer’s office and state governments, which control a lot of public-sector spending power.

Tuesday’s easing in monetary policy follows an announcement in October of the federal government’s big spending budget. Treasurer Josh Frydenberg has pledged to keep the fiscal taps flowing for as long as it takes to get unemployment back to its pre-pandemic level below 6%. That effort will underpin the economy’s recovery over the coming years, but comes at a cost of government debt soaring toward A$1 trillion.

“Arguably both fiscal and monetary policy settings are the most stimulatory they have ever been,” said Craig James, chief economist at Commsec.

The improving economic outlook comes as Victoria, which accounts for about 25% of the national economy, has only just been released from harsh lockdowns. Victoria’s return to action will spur a rise in jobs ads, boosting consumer confidence further, and support house prices, which rose in October for the first time since the virus savaged the economy in March and April.

Australia’s improving outlook is built upon its success in containing Covid-19. A resurgence in case numbers remains the key risk to the economic outlook, but for now the country’s success stands in stark contrast to the situation still unfolding in Europe and the U.S.

Externally, Australia’s biggest trading partner, China, has also returned to growth, helping to lift all boats in Asia.

Australia’s economy is in recovery, and the level of stimulus being directed toward it dwarfs anything seen prior. After a long and difficult 2020, there’s reason to be upbeat about the outlook.

THE WALL STREET JOURNAL / DOW JONES NEWSWIRES