RBA finally recognises a glass half-empty economy

Tuesday’s monetary policy decision by the Reserve Bank of Australia takes official interest rates into new territory. At 0.5 per cent, the cash rate is a whisker away from the unconventional printing-money responses that would signal a full-blown economic and financial emergency. The RBA could not stand in the way of the market herd and the changed sentiment among the globe’s top central bankers as the coronavirus outbreak threatens to wreak havoc on the world economy. It’s an abrupt about-face for RBA governor Philip Lowe, the last optimist standing, a “glass half-full” man in every respect, even after the Black Summer bushfires, drought, US-China trade tensions and the cold-shoulder response of consumers and businesses after three interest rate cuts last year.

Truth be told, the central bank is out of firepower and risks smothering the little confidence there is. Uncertainty reigns in an evolving situation, says the RBA chief, with growth weaker this quarter, and it is “difficult to predict how large and long-lasting the effect will be”. So the anticipated knock-on effects from COVID-19 have the nation’s official family of economic advisers in a huddle to make sure they are fighting the same war. The task is to support spending and employment as the supply-side shock worsens. Budget policy must carry the burden. Scott Morrison is adjusting the dial almost daily on his government’s response as Canberra officials finetune a recovery.

Last week the Prime Minister was calming expectations for a big stimulus, contrasting the Coalition’s approach to Labor’s “extreme” cash splurge to boost liquidity after the global financial crisis. On Thursday, Mr Morrison said Treasury was working up a plan that was “targeted, modest and scalable”. Ahead of the RBA’s move, he said the plan would be “measured” and would focus on jobs, cashflow and investment. Business is being hit by falling demand and supply bottlenecks out of China as the world’s factory shuts down. The tourism and education sectors are the first to be hit, but with confidence slipping and material shortages likely to emerge in coming weeks, the wider economy also will be shaken.

No one can yet say whether we are going to see a V-shaped bounce back or a longer, deeper, U-style period of stagnation for national output. But Mr Morrison should be wary of baking into the budget measures that are purely a response to a temporary hit. So far he has been keen to assert COVID-19 is a health crisis, not a financial one. There will be an economic cost, but the challenge is to support only industries and workers in the vortex of the supply crunch. As we have argued for years, a strict fiscal regime in Canberra — with tighter, high-quality spending — delivers lower taxes and is the key to building a viable safety buffer when unexpected events knock us off course. With a budget in balance, a slim current account surplus, robust export prices and solid employment levels, the nation is in reasonable shape to absorb a swift, hard blow. Beyond this macroeconomic challenge, we still need to address a range of supply-side reforms that would make our economy flexible, resilient and more competitive. We need a super-sized, toughened glass that is full.