Don't Let That Recovery Fool You, Australia

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Ah, a return to the halcyon pre-Covid days of low-single-digit growth. One can only hope Australia’s pattern of overt smugness and complacency doesn’t follow, for navigating the exit from stimulus will require a heavy dose of humility.

The country has managed to climb out of its pandemic-induced economic hole, recording gross domestic product growth of 1.8% in the first quarter from the final three months of 2020, the government reported Wednesday. While down from the the fourth quarter’s revised 3.2% clip, the number was better than anticipated, and put activity above levels notched before the coronavirus outbreak, the statistics agency said in a statement accompanying the numbers

The milestone is a reminder of bygone days after the turn of the century, when Australian politicians and executives thought they had it all figured out. The country seemed to have nailed some magic formula — based on developed-world standards of living, in a region dominated by vibrant emerging markets — that helped it sail recession-free for almost three decades. 

The latest figures come a day after the central bank hailed the recovery, and signaled it will decide next month on the fate of quantitative easing, as well as its policy of capping yields on certain government bonds. Some departure from this extraordinary level of support — considered a fringe possibility before the pandemic — is called for, given the success of the recovery. The Reserve Bank of Australia may opt to keep QE in an abbreviated format, while retiring so-called yield curve control, which aims to keep rates on three-year sovereign debt near zero. This would display some confidence by testing the waters on withdrawing accommodation without leaping too far into the unknown.

The hesitancy is justified. Inflation is a long way from settling in the RBA’s target range of 2% to 3%, and such a dramatic break with policies of the past year would likely cause the Australian dollar to strengthen too much. Officials also fret about the vitality of the labor market. 

By the Reserve Bank’s own admission, the rebound has been aided by fiscal and monetary caffeine. Prime Minister Scott Morrison isn’t about to snuff out the spending contained in his government’s budget released last month. Morrison’s conservative bloc, once fixated on surpluses, will run deficits at least until 2025. The prospect of a national election within a year makes it doubly unlikely to be dismantled. 

Australia now has a largely domestic economy, fortified by government support but looking inward. Borders are effectively closed. Morrison won’t rush to alter that — the recent budget props up tourism and aviation. The underlying narrative seems to be based on fear-mongering that opening up to outsiders will spark another outbreak. This is a particularly acute problem because vaccination lags behind many other developed countries.

Australia’s policy of eradication, rather than containment, means that even small outbreaks are swiftly followed by city or state lockdowns — putting an inevitable brake on growth. RBA Governor Philip Lowe alluded to this in his statement after Tuesday’s board meeting: “An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated.” The lockdown of Melbourne, the second-biggest city, will be extended beyond the initial seven days, a senior provincial leader said Wednesday. Its population of 5 million people is now experiencing a fourth shutdown. This stop-start pace means the journey to economic normalcy will be slow going.

By all means, savor the recovery, Australia. But this is no moment for self-congratulation. There’s nothing uniquely antipodean that will save the country from Covid.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2021 Bloomberg L.P.

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