Economic challenges ahead
The Reserve Bank and government need to do more to stimulate Australia's
sluggish economy after recent interest rate and tax cuts have had little
positive impact, according to two leading economists.
The RBA has already cut official interest rates twice in June and July to
new record lows while households have received around $7 billion in tax
cuts, however business conditions remain muted in the face of weak
"What you’ve got is a consumer that is scared, and we don't see that going
away and we don't see the tax cuts causing any sort of momentum," National
Australia Bank Chief Economist, Alan Oster, said at the AIC 2019
"Even though we're the largest business bank, we're finding it really
difficult to get credit away, and so we're really worried about the private
sector not really improving much, in total."
NAB Monthly Business Survey
in August revealed growth in the private sector has continued to
deteriorate with business confidence falling three points to +1 index point
and business conditions dropping two points to +1 index point.
Westpac Institutional Bank Managing Director and Global Head of Economics,
Bill Evans, said it's unlikely Australia will return to trend growth,
despite the RBA's expectations.
"I'm not seeing a recession, but I am seeing a long period of below trend
Fiscal policy needed
Oster said the economy needed more fiscal policy, such as bringing forward
the next round of tax cuts. NAB's data analysis shows that households,
still concerned about weak wages growth, are spending less than 20% of
current tax cuts.
"It's stupid to be using interest rates. From a bank's point of view,
customers don't change their behaviour in paying off [their mortgage] and
so you lose that liquidity effect completely."
The RBA has also
that government infrastructure investment and structural reform would be
more effective than cutting interest rates. Evans said the government could
upgrade existing infrastructure, which would push money into the economy
quickly, but it was unlikely.
"I think they're really hung up with this election promise surplus," Evans
Oster and Evans both expect the RBA to cut rates again later this year,
with Evans suggesting they should move immediately given weak economic
"We're still seeing quite strong growth in health, education, and tourism,"
Oster said. "It's just that the traditional areas that rely on the
consumer, they're in recession, let's face it. I've got readings in the
business survey and retail that I've got to go back to 1990 to get worse
readings. So, I don’t care what Gerry Harvey or anyone says – they’re in
US-China trade stoush drags down growth
Oster said the US and China – the two economies with the biggest impact on
Australia – were both slowing although he did not expect either to fall
into recession. The trade war between the two countries has created
significant uncertainty and is already dragging down economic growth as
tariffs continue to climb.
"I'm hoping that it doesn't get worse, but I'm not expecting it to get
better," Oster said.
Evans said China is slowing but it can still pull economic levers such as
housing. Trump remains the swing factor in the trade war – he may change
tack if it becomes a political liability although markets would be
"I think China will play the long game," Evans said. "I think they'll
absolutely be looking towards the next US election."
Trade uncertainty and slowing global economic growth prompted the US
Federal Reserve to cut interest rates by a further 0.25 percentage points
in September – its second cut this year. Prior to the rate cut
announcement, Evans predicted three cuts by the Fed this year with more to
come in 2020 as the China-US trade stoush continues.
"I would expect that as long as you don't see any major financial
imbalances, and it doesn't look as if they are emerging in the US, that the
Fed can be quite aggressive," he said.
However, he also expected the US to avoid recession with the inverse yield
curve – historically a signal of recession – distorted by very low German
and Japanese bond rates.
Europe looking at extended recession
While the US, Chinese and Australian economies are slowing, Europe is
unlikely to avoid recession.
"We could argue that Germany is on the precipice of one now," Evans said,
"Italy has probably been permanently in recession for a long time and of
course, Brexit is going to impact Europe as well."
The European Central Bank cut its benchmark deposit rate by 10 basis points
to -0.5 per cent in September and announced plans to re-start quantitative
easing in an effort to revive the eurozone economy.
Evans said negative interest rates had devalued the Euro but its main aim –
to force banks to lend – had failed.
"Now it's just a tax on banks because the sort of people that want to
borrow from them, they don't want to lend to."
Meanwhile, Britain's exit from the European Union has yet to be resolved
under new Prime Minister Boris Johnson, adding more economic uncertainty to
markets. Evans said he would not be investing in Britain and predicted
further falls in the value of the Sterling.
"I think the Sterling could go well below $US1.20. Some people are talking
about parity with the US dollar – I don't believe that, but I wouldn't be
investing in the UK at this stage."