2020 is a huge year for the Australian economy. Our record run of growth is on the line, unprecedented monetary policy is a possibility, and the nation must rebuild from devastating bushfires.
To think about how it all fits together, it’s helpful to consider the predicament of the Reserve Bank of Australia (RBA).
The RBA is charged with generating growth and inflation, and promoting employment and financial stability. Recently this has proved, frankly, too hard. Growth has been weak, unemployment and underemployment are still too high, inflation is below the bottom of the RBA’s target range, and house prices have oscillated wildly.
In 2020, the RBA must try to pull everything back together, while the real world keeps throwing up new and terrifying risks — first trouble in Hong Kong, then unprecedented bushfires, then the spectre of a horrible war in Iran.
A cut? And then?
The RBA’s decision-making in 2020 starts with the February board meeting two weeks next Tuesday. It has never faced a board meeting like this one, with just two more cuts up its sleeve.
The RBA may well use up one cut in February — according to the RBA Rate Indicator, there’s a 56% chance there’ll be a cut in official rates from 0.75% to 0.5%. That will reduce its remaining ammunition to one. The bank has said that once rates hit 0.25%, there will be no more. Then, RBA Governor Lowe has indicated, it will move to unconventional monetary policy.
That means buying bonds. Once the official cash rate sinks to 0.25%, the RBA has said it will intervene in long-term government bond markets to try to reduce long-term interest rates. There is a real chance of this in 2020.
Intervening in bond markets is a risky and untried manoeuvre that could come with great costs. The greatest of which might be that it doesn’t work. The EU, US and Japan have all been engaging in unconventional monetary policy in recent years and none of them have a growth record that is especially impressive.
The whole conceptual basis of monetary policy — that lower interest rates generate inflation and growth — is up for debate in 2020. This is because, at the moment, lower interest rates seem primarily to jack up asset prices. US stock indexes and Australian house prices alike attest to how effectively they do so. Recent new record level in Australian stocks — indexes have risen over 7000 — is as much about monetary policy as earnings growth performance.
Expect a lot of headlines about the RBA this year. Its work has never been more risky.
The fires
Bushfires will obviously affect the Australian economy in 2020. But how, and how much? The roaring flames have destroyed a vast amount: lives, homes, livestock. But we measure the economy not by the stock of things that exist but the flow of activity: spending and income.
The bushfires will have two effects on economic activity: suppressing it now and boosting it in the recovery phase. The suppressing effect may well be the greater. Holidays have been cancelled, farms and businesses are forced to shut down, and people are trapped at home by appalling smoke in Sydney, Melbourne and Canberra.
But later in the year, as insurance payouts flow, government fiscal responses begin to hit, and rebuilding starts, economic activity will rise. However, this will be focused on a narrower group: those who live in the path of the flames.
Incidentally, it is during disaster recovery that you really come to realise the inadequacies of GDP as a way of measuring the economy. All the money spent rebuilding lost homes counts as economic activity. Working overtime to rebuild what was lost shows up in the economic measures looking like progress.
Risks we no longer face
But while there are significant new problems, it’s worth remembering other risks have faded. US-China relations look to be on the mend, with a phase one trade deal inked and progress to phase two. Brexit is working its way to a resolution. Even the US-Iranian dispute appears, for now, to be amazingly short-lived. These issues were set to blow up our economy, so putting them behind us can’t hurt.
Indeed, you can make a case that we may already be in the beginnings of a recovery — globally and domestically.
Australia’s economy increasingly depends on the vicissitudes of the global economy, and hopes are high for both the US and China. Meanwhile, Australian retail spending was strong enough in November to be a shock to all market watchers. It rose 0.9% in one month alone, compensating for several bleak months prior. December will tell a different story, but it could also be that a turning point has been reached. After all, unemployment fell sharply in November too.
The RBA could even discover during 2020 that its vigorous rate-cutting in 2019 is finally taking some effect, removing the need for further cuts. Economies are inherently unpredictable, and even in the most terrifying moments we should remember that the presence of risks does not automatically mean the absence of growth.
Ironic that the neoliberal/Laberal view that the only responsibility of business is to make money is anathema to Adam Smith’s moral theory, despite their promos of their self-serving rewriting of Adam Smith’s views.
Jim Stanford, Centre for Future Work, said in Aug ’19 “It’s funny, with all this conversation about dole bludgers, the group in Australia that’s really been accustomed to getting money without working is the business community. Their profits are at near-record levels, and their investment effort has rarely been weaker. And yet all they can do is demand more government handouts.”
Future events are normally uncharted territory.
How about starting with the admission that we ordinary wage-earners now derive virtually NO benefit from economic growth, however measured?
Economic growth and trade are now giving nothing to working people, hence the stagnant wages PLUS the record low share of wage income as a share of National Income.
Observe this continuing ideological practice of writing about “Australia’s economy” as though we all benefit equally from “growth”. Through such relentless repetition the ruling clique thus reinforces the hold of its dogma on our minds. Never mind that many of us now benefit not at all from “economic growth”.
Redistribution through increased transfer payments and increased real wages is what we and our economy need.
The stupidity of this article( and the writings of other so called financial experts) means the journalists are ether dumb or corrupt, the reason for Australia`s dying economy is simple, the coalition government has introduced trickle down economic policies designed to force wages down by allowing over 1 million 457 visa cheap workers and backpackers into the country to compete with local workers and trades people for an ever shrinking share of the employment market, on top of this they have emasculated the trade unions, stacked the wage fixing authorities with their own stooges and corrupted the AFP into becoming their personal police force to stamp out any dissent that might reveal to a very dumbed down electorate as to what to their economic intentions for them are, with discretionary income shrinking people have less and less disposable income after basic living expenses to spend in the local economy meaning the collapse of more and more small and medium retail and service business, the low interest rates are their way of forcing retirees and investors into the share market to speculate and risk their savings and force the share market higher as ever more people are forced to buy in , cheap labour increases the profits of overseas owned big and multi business who are then rewarded by more and more tax cuts and subsidies so they can afford to donate ever more to the coalition parties and reward them with cushy after politics jobs, this was only achievable with the help and support of a corrupted media and a dumb and ever dumber electorate, and any sign of discontent is soon masked by a call for patriotism or a foreign war , this is what Reagan and Thatcher did 40 years ago in the U.S and Britain and John Howard started her in 1996, the stupidity and blind ignorance has allowed the serfdom of ordinary people for hundreds of years, its said that Frank packer once stated that the population of the world was only really 5000, the rest are simply drones to do their work and die as cannon fodder in their was of wealth and greed, they say there`s a sucker born everyday, actually there`s millions of the dumb fools born every minute, I thank god that at least I`m not one of them.
Braddybear -You mustn’t be an economist-you make some commonsense analysis
The Reserve Bank has the numbers.
The Labour and Capital Shares of Income in Australia …
by G La Cava – 2019 – Related articles
Mar 21, 2019 – In Australia, the labour share of income – the share of total domestic income paid to workers in wages, salaries and other benefits (‘compensation of employees’) – rose over the 1960s and early 1970s but has gradually declined since then (Graph 1).
Nice info graphic in this one.
Infographic: The Shrinking Labour Share of GDP and Average …
Aug 31, 2018 – Infographic: The Shrinking Labour Share of GDP and Average Wages … in the share of Australian GDP paid to workers (including wages, salaries, and … In the March quarter of 2018, labour income (in wages, salaries, and
The fires are merely icing on the decrepit economic cake – all last year the Reserve Bank was flailing around out of its depth – and whatever action it took the economy kept getting worse.
Last few weeks every day the news has some company going into administration – Just Jeans this week plus NoniB group , Last week it was Bardot – who next week . What is ignored is the displaced employees 1000 here 400 there. The economy is dying by 1000 employment cuts . The Reverse Bank employees just stare at their computer screens making up meaningless charts and really do’t have a clue how to chart a course forward as they have run out of ammunition- their mantra was we have to stop inflation well that is fixed without their help. Now they don’t know what to do.
The writer of the article must be nuts as he states -you can make a case that we may already be in the beginnings of a recovery- we haven’t reached the bottom yet.
Retail spending rose by 0.9% in November while numerous retail chains have gone into administration or receivership while David Jones lost almost $500M in 2019. This extra spending must be at Bunnings?
no it was the blip that should occur at Xmas – now occurs in November – we celebrate US thanksgiving weekend
Black Friday officially commenced 29th November 2019. Spending brought forward and also of interest would be how much of this spending was generated by the creation of new debt. Debt has to be repaid and is in effect future consumption brought forward at additional cost in the form of interest payments on the debt.
That is in aggregate, spending at each store or chain can be different from that aggregate. Retail is also a varied sector, you have supermarkets and maccas lumped in with specialty stores and seasonal businesses reliant on tourism.
So the sector as a whole can have a nice month, but particular companies can be unable to get back to profitability and close down.