What we need is useful fiscal policy, not interest rate cut

RBA governor Philip Lowe. Cartoon: John Spooner

The fundamentally dumb decision by the RBA to cut interest rates highlights central banks’ overweighted concern with financial markets and the apparent complete absence of more useful fiscal policy to boost an economy suffering from a confidence shortfall.

The rate cut may on the margin prevent an appreciation of the Australian dollar when the US Fed cuts by up to 50 basis points later this month but will have zero effect on boosting the economy.

The decision and also most reaction by the big banks to cut rates by 25 basis points was no surprise. Nor was the fact the “naughty bank” Westpac was first out with a full rate cut.

The banks are yet to say what they do with deposits which in many cases are earning little interest already and the decision will hit bank profits.

Prime Minister Scott Morrison gave the game away, before the RBA decision was unveiled, when he used a lunchtime press conference to urge the banks to pass on any rate cut. He has also promised an economic statement detailing the government’s response to the coronavirus.

The RBA said pointedly in its statement: “The Australian government has also indicated that it will assist areas of the economy most affected by the coronavirus.”

Its statement was all about the virus, which was mentioned six times in the one-page release explaining the decision and the impact it will have on the economy.

The RBA has long held a more optimistic view on economic growth than the market, forecasting 2.8 per cent growth this year as against 1.4 per cent from NAB.

Westpac is expecting first quarter GDP to be at best at zero per cent and possibly negative.

Recent rate cuts have been used by home loan borrowers to pay back loans faster rather than spend money and there is no reason to expect any change this time.

At 0.5 per cent interest rates are already at record lows which further mitigates any benefits from a rate cut.

Last week’s turmoil on global equity markets which saw them fall by over 10 per cent has clearly panicked central banks. By bowing to the markets’ demand they risk becoming hostage to the market rather than setting economic policy.

The areas of the economy most affected by the virus are tourism, education and to some extent retail, while other sectors are suffering supply chain issues with Chinese suppliers unable to get goods to ships and aircraft .

Most in business say it is too early to tell just what the supply issues will be, which is another reason why the RBA was dumb moving early before the impact is known.

In its statement the RBA said the government would concentrate on areas of the economy hit by the virus, when what is needed is fiscal policy aimed at getting people spending money.

Former Productivity Commission boss Peter Harris has raised three possible reforms including rental assistance to welfare recipients, tax credits to low-income earners, and increased apprentice pay by way of tax credits for their employees.

All three measures are aimed at putting money in the hands of people who will actually spend it rather than those who will use tax breaks to boost savings. Business calls for increased investment allowances make some sense and should have been in place ahead of the virus but business will only invest if it sees demand.

Westpac’s Bill Evans said the government should bring forward tax cuts to boost spending. He also said the government needed to forget about the surplus and instead prevent further downside by boosting business confidence.

The government’s coming economic statement in reaction to the coronavirus is both overdue and welcome and should make clear exactly what plans are in place to boost spending.

The rate cut was described as an “insurance cut” but Fidelity’s Anthony Doyle said, “the economic benefit in the real economy is questionable”.

The initial recovery in global stockmarkets was a show of power over monetary policy.

That is not exactly a positive and certainly is a long way from support for the concept that a cut in rates translates to a stronger economy.

The dividend yield on the ASX including franking credits is around 5.25 per cent as against just over 1 per cent for cash and in financial markets the game is relativities.

Investing in even overhyped stocks is relatively better than parking your money in cash. It is of course also a risky bet as the last week has shown with prices falling by over 10 per cent.

Stockmarkets have welcomed the rate cuts even before they happened, based on US Fed chair Jerome Powell’s statements last week supported by the central banks of Japan and China this week.

UniSuper’s John Pierce said he would make his judgment on stocks based on the spread of the disease and if there is evidence of its being under control in the US in a fortnight then it’s time to buy.

We are not there yet.

Slimmer Downer

Downer boss Grant Fenn wants to turn his empire into a capital-light urban services company, which explains the sale of his mining services and laundry business which could raise well in excess of $880m.

By the month’s end mining services should be gone and given the division has a book value of $550m that will be the line in the sand on any sale.

Buyers include Perenti and Oaktree Capital.

The old Spotless laundry is a smaller division with earnings before interest, tax, depreciation and amortisation of around $60m and a sale price around $250m.

The bidders include private equity groups such as Anchorage and CPE Capital with the trade buyers including Alsco and South Pacific. The private equity bidders are trying to knock out the trade buyers by arguing they would breach ACCC guidelines given the combined market share.

Spotless has around 25 per cent of the mainly hospital linen market and 15 per cent of garments which is dominated by Alsco.

The combination of Alsco and Spotless would have 70 per cent of the garment market while a combined South Pacific and Spotless would control 57 per cent of the linen market.

The ACCC has not notified the proposed sale which is due to go to final bidders at month’s end around the same time the mining services auction should be completed.