There are tools the federal government and Reserve Bank could use to kick-start the economy, especially after a difficult start to 2020, which included the bushfire crisis and Coronavirus epidemic. Some of these options – like tax cuts – could help boost spending and sentiment in what is set to be a sluggish year for growth.
The high-level outlook
Even before the calendar year began, the growth outlook was subdued at best for Australia. It’s important to note that, though the volatility of the first few months has rattled markets, it was never looking to be a stand-out year for GDP.
There are a number of factors contributing to this, which were known to us in 2019. For example, we have low wages growth, and business investment growth isn’t particularly strong. The mining sector is also coming back as a share of the economy, but non-mining growth remains relatively soft.
In November 2019, annual growth retail spending has fallen to 2.7% from 3.3%. This year, consumer spending will be impacted by the bushfires and the impact of the coronavirus travel restrictions on the tourism industry.
Overall, we expect GDP growth in Australia this year to be at around the two per cent mark, which is tracking lower than the average of about two and half to three per cent.
Given the subdued growth projections, there are a number of measures that could be on the cards this year.
Income tax cuts
For Australian households, tax cuts are one of the most effective forms of stimulus the federal government can action.
At this stage, there is nothing officially in the works, as per the mid-year economic outlook released in December last year.
However, the federal budget is set to be handed down in May, which is often where the government announces any changes to tax concessions or new tax cuts. For example, at the last federal budget, Treasurer Josh Frydenberg handed down tax cuts for middle-income earners, effective immediately.
Cash rate cuts
We expect the cash rate will continue to fall in 2020, reaching a low of 0.25% over the next six months. We don’t expect the cash rate to fall beyond that point, because it’s unlikely that cuts beyond that point would be passed on by the banks, through interest rates on mortgages.
Only when the cash rate reaches about 0.25% and there are signs that the government is not going to provide stimulus via fiscal policy would the RBA embark on a quantitative easing program.
Quantitative easing usually involves using printed money to buy up securities, government bonds, highly-rated mortgaged-backed securities and highly-rated corporate debt.
The aim of quantitative easing is to inject cash into the economy, in the hope that some of it will be lent out, that people will take on more risk and that long-term interest rates will remain low.
This measure would provide some help. However, if you look at other countries that have employed quantitative easing, there hasn’t been a big increase in lending. Our bond and interest rates are already low, and most Australians borrow over the short-term and not the long-term.
At this stage, the federal government appears to be more open to providing a smaller surplus in the 2020 federal budget, in order to provide further relief to the bushfire-impacted parts of Australia.
A surplus is important to Australia’s triple A credit rating, so this is something to keep an eye on. Windfall from commodity prices would be supportive of a surplus, which for the time being, is a wait and see situation.
Subscribe below to Market Watch to receive my latest articlesDiana Mousina, Senior Economist
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