The Reserve Bank’s message is: the worst is yet to come. We avoided a much worse economic catastrophe by suppressing the pandemic in most areas faster than expected, but Victoria — and the nature of the damage inflicted on the economy already — means we face years of joblessness, stagnation and lost growth.
In governor Philip Lowe’s post-meeting statement yesterday — which anticipates some forecasts from the bank in its quarterly statement of monetary policy this Friday — he revealed the bank sees unemployment at about 10% at the end of the year compared with its 9.5% estimate in May, and higher than the 9.25% estimate in the federal government’s economic update on July 23.
The RBA said the jobless rate would still be around current levels — just above 7% — in a couple of years.
That’s a lot of people out of work, and a lot of households struggling to make ends meet, and a much more pressured financial system in a country with a lot of household debt.
And after consumer inflation fell to minus 0.3% in the June quarter, Lowe said the bank expects it to be positive in the current three months, but: “Beyond that, given the ongoing spare capacity in the economy, inflation is expected to average between 1 and 1.5% over the next couple of years.”
By then we’ll be looking at the prospect of a decade of inflation being routinely below the RBA’s target band.
Lowe has previously made it clear interest rates will be on hold for at least three years.
Now the preferred phrase is that its “accommodative approach will be maintained as long as it is required. The board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band.”
On current forecasts/vague estimates, that is unlikely to be until the mid-2020s. And that progress towards full employment isn’t going to come merely from “accommodative” monetary policy.
As Lowe said yesterday: “The Australian government’s recent announcement that various income support measures will be extended is a welcome development and will support aggregate demand. It is likely that fiscal and monetary stimulus will be required for some time …”
So we’re not done with fiscal stimulus. Not by a long stretch. Not if we want to get unemployment down substantially.
This is an implied rebuke for the supply-siders in the commentariat and even, if you want to be malicious, Treasurer Josh Frydenberg and his Thatcherite fetish. The problem in the economy is insufficient demand, not supply-side problems requiring another bout of punitive “reform”.
Consider, for example, the external side of the economy, once upon a time the prime example of how Australia badly needed industrial relations and productivity reforms.
We just recorded a record trade surplus of more than $76 billion (in original terms) in the year to June, more than double the 2018-19 result and 10 times the size of the 2016-17 surplus.
It’s true that this was partly a function of weak demand in the economy with imports down 5%. That downward trend started in December, before the pandemic (illustrating how stagnant things were before the crisis).
But it mainly reflects that Australia has become an export powerhouse courtesy not just of mining and China’s hunger for our minerals but of education and tourism.
Education and tourism will nearly vanish from our list of exports this year, but iron ore will go from strength to strength on the back of higher prices, driven by a highly innovative, productive and high-tech mining sector (gold will help too, given current prices).
The challenge is to get Australian households confident, secure and spending again, not punishing them with neoliberal fundamentalism in the name of ’80s-era supply-side economics.
All very well selling all that iron ore to China but what is it being used for? In the 1938 Dalfram dispute (where Pig Iron Bob Menzies) got his name, the unions were concerned that our iron was being used by the Japanese armaments industry for their militarism and so tried (unsuccessfully) to block the iron exports. We should being using an equal amount locally to that now being exported to upgrade our defense capabilities, combined with National Service.
So the several hundreds of billions we have already committed for highly questionable military projects isn’t enough? I think it’s beyond time we looked seriously at social housing, road building and other infrastructure programs. Good for the country, great for jobs and actually productive rather than throwing good money after bad at the military.
With all due respect, Chris, a fundamental characteristic of primary producers (agriculture and minerals) is that “those who beg seldom get to choose”. We either have exports or not. To become shoulder to shoulder with you our Asian diplomacy is in a dreadful state and we’re banging on about a non issue of a virus that at most would kill 20,000 (based upon the Swedish experience) if we were to run the flag up tomorrow.
We ought to improve our diplomatic and research opportunities. If the latter then some students just might return. There are options.
20,000, what, per annum, or 20,000 and that’s it?
Given that it seems immunity may not be conferred by getting it, or may only be good for 6 months, or other reports of people who had tested positive but had no antibodies In their system, and you seem to be basing it on figures from Sweden, whose figures may not be good, or equivalent to our conditions, and that is for the 5 or 6 months it’s been in Sweden, and not considering substantially greater chance of mutation if it goes through the whole populace, (Noting that an RNA virus doesn’t have the same capacity for successful mutation) and if their culture of following rules and not being dills is the same as us.
Your blithe indifference to human suffering is impressive Erasmus. As an educated man you must be doing some serious mental gymnastics to arrive at that point.
Have you really arrived at a well thought out position, or have you decided that aggressive suppression cannot work and you feel it’s worthwhile playing around with amateur extrapolations with seemingly no regard for the fact that each death has a substantial number of people close to that person who will be devastatingly affected. Is that the best use of your education?
Not to mention the long term effects, it is becoming apparent, that many will suffer.
> 20,000, what, per annum, or 20,000 and that’s it?
There is an adage among the statistical profession that “all models are wrong but occasionally one may prove useful”.
The modelling is done via a logistic equation. Adam (two days ago) had the number at 30,000 in his article. There isn’t a lot of difference in the order of magnitude Log10(x) – x being 20,000 or 30,000 so, for the sake of modelling, either number will do. The number represents an upper bound so the number refers to your “that’s it”. The number (20,000) amounts to that of a moderate sized suburb in a largish city and the time line could be five years (ignoring radical mutations) – in which case we begin again – whatever the model.
The issues of vaccines, vaccines as the virus mutates and associated immunities would require at least 1,500 words to scratch the surface so, keeping the reply short, I will address what seems to be your principal objection as to my apparent indifference to the envisaged deaths and those who will not recover completely.
I most certainly do give a damn as to the deaths but not from a “poor bugger me” perspective. The damned thing is not going to obligingly return to Wuhan. It is here to stay (and could remain dormant for a long time) and the current commercial damage is significant and not just in Australia.
The assumption that suppression = elimination takes us nowhere. Its a long game, DB, and, globally, there is only about six months of data which is next to nothing to form definitive policy. Add to that the current view of the other fellow and we find ourselves with the policies that we have.
I pointed out, in a number of posts yesterday, that pneumonia is knocking off 3.4x what Covid-19 is doing. Deaths from cancer (YTD) are in the order of 15,000. The deaths each day from Covid-19 in Sweden compare with their road or traffic deaths. The virus thingee is not that major when compared with other ills (including dying in one’s sleep).
Hopefully, by now, you might appreciate that the matter (for me) is not one of “blithe indifference” but getting priorities into some kind of order. The topics of economic forecasts or diplomacy are much more important than a virus which, comparatively, is not killing all that many people. A YTD total of circa 250 for Oz is not something to become over excited about.
The question that ought to be asked but is not asked takes the form : “is the lock-down stuff, allowing for additional lock-downs, commensurate with the threat? My reply to Adam (both days) addresses this question.
As an aside, one of my recommendations to Crikey will be to have a “scratch pad” for miscellaneous topics. A decent web programmer could create such a section in 10 minutes.
“iron ore will go from strength to strength on the back of higher prices, driven by a highly innovative, productive and high-tech mining sector”
Are the miners “innovative”?
I think I remember hearing this mantra over 2012-13. Almost a decade on I would not say that ore has gone “from strength to strength”. Its damned fortunate that we have ore as a commodity to sell otherwise god knows here the value of the A$ would be; Rio Tinto being a separate topic.
Well yes they are. More AI happening in the mining industry than in most. Autonomous drilling rigs and trucks abound. More and more profits, less and less workers and believe it or not we give them enormous tax breaks to do it. Maybe one day our polices will catch on.
Self correcting Crikey. I meant pollies NOT policies.
The conservatives fetish of cut and slash has never worked, they slash incomes for the masses and cut tax for the wealthy, its demand that drives the economy and you cannot get demand when consumers discretionary income recedes year after year, small business support of penalty rate cuts and lower and lower wage increases will be their undoing, small business relies entirely on local consumers where big business usually export to countries they are high wage consumers, so they are the only beneficiaries of a low wage society, greed and laziness will destroy most small business over the coming years they should remember that the employees are someone else’s customer and vice versa, fools and their money are soon parted and their are a lot of fools trying to run small business.
For a couple of seasoned writers this piece is a tad myopic guys. Given the last paragraph, are we contemplating pre-selection for the House of Reps come 2022?
The essay might have commenced with the global picture if only because Australia is affected by the real world. The virus thingee is having an effect on business (globally) to the point (globally) were the GDP for any country is not going to be what it was in 2018.
Then a scavenge on the ABS site would have prevented being overly reliant upon the perspectives of Mr Lowe but, in the same breath, I don’t deem them to be unrealistic; a tad conservative in fact. There are actually a number of scenarios. Then, of course, we’re dealing with the “here and now” with no thought to a contingency of a 3rd or 4th wave; yep the virus is mutating.
Of course the problem is demand. Keynes explained that issue to the world in 1936 but even all-dancing Sweden is compromised by the policies of her neighbours (try going to Norway or Denmark coming from Sweden) and the effects of their respective economies. Its damned fortunate (see Murphy of today) that we have a buyer whose forecast is positive in terms of its GDP and we would do well do spare a thought for the diplomacy.
With the basics back in order your concluding paragraph just might make a bit more sense.
“and a much more pressured financial system in a country with a lot of household debt“.
Here is the really interesting thing about this all. It seems to me that our imbalanced economy reliant on excessively inflated house prices and excessive bank profits on the back of that, if the virus doesn’t correct this imbalance then how exactly does this unwind?
We currently have people working for the banks for 2 – 3 days per week, without realising what we were doing (well, most).
This household debt weighs down the entire economy, and if we are needing demand side stimulus, which I agree with, how are we going to make that happen when we are so loaded up with debt.
And if the virus hadn’t come along, how would this imbalance ever have been fixed? Our genius economic leaders and guides got us to this point, what have they got to get us out? Feature the sounds of crickets here.