An Adventure in Economic Wonderland Comes to an End
(Bloomberg Opinion) -- One of the biggest repercussions from the Covid-19 outbreak in Australia ought to be the end of its island mentality. A near three-decade expansion fed a myth of invincibility that now seems to be coming to an end. Luckily, central bank chief Philip Lowe never fully bought into this hype, and has rightly accelerated plans that he'd been considering for some time to restore the economy. Let’s hope he’s not too late.
On Thursday, the Reserve Bank of Australia deployed its remaining conventional monetary ammunition to offset a slowdown, amid predictions that gross domestic product would shrink this quarter and next. The RBA cut its main rate to almost zero, announced it will try to hold the three-year government bond yield at about 0.25% and unveiled a raft of support for banks. The federal government — long averse to the idea of prolonged deficits, and convinced surpluses equate to economic awesomeness — has also pledged to do its part.
In response to the pandemic, Australia has effectively closed its borders, banned most gatherings of 100 people or more and declared a human biosecurity emergency. The country has 565 confirmed cases of the virus and six deaths. Cruise ships are clogging Sydney Harbor, Qantas Airways Ltd. furloughed most of its 30,000 employees, the cricket season has been curtailed and the southern island state of Tasmania has all but shut itself off from the mainland.
Even before the virus arrived, it was a tough start to the year. A horrific bushfire season killed at least 28 people, destroyed an area almost the size of England and left thousands with respiratory issues. Fire has long been part of life on the continent, but with a population concentrated in cities and towns along a sliver of the east coast, it rarely touched the lives of urban Australians. Many saw their childhood seaside vacation spots ravaged and cities blanketed with noxious haze, as I’ve written.
It’s not that a three-decade expansion shouldn’t be lauded — it even captured the attention of big names at the Federal Reserve — but the hubris surrounding it ended up blinding some officials to the crumbling economic conditions around them. The idea that the ultra-easy monetary policy deployed in the world’s biggest economies during the Great Recession would one day be required in Australia was met with disdain. The country basked in the new model it represented: a developed-world economy, with Western institutions, at home in the Asia Pacific and buoyed by proximity to China and other fast growing Asian markets.
The Kool-Aid wasn't just being guzzled in economic circles. Hollywood stars, feted novelists, chefs and the 2000 Sydney Olympics fueled this sense of a magical wonderland. Australia even had a world-beating cricket team from about 1989 until fairly recently, trouncing the old rival England consistently until 2005. The team won five World Cups between 1987 and 2015, more than any other nation. Indeed, the idea Australia is somehow set apart from the rest of civilization has been a recurrent theme since British settlement in 1788: Early Sydney was largely built by convict labor.
The one person who never appeared to buy into the propaganda, however, is RBA Governor Philip Lowe, who began his stint in 2016. Lowe has made the point in speeches that, within those sacramental recession-free decades, there have been distinct periods when activity had slackened and sped up. He has said that immigration has played a big role in keeping GDP expanding.
The decision-making time frame has collapsed upon Lowe, as it has with his counterparts abroad. He spent a lot of time worrying about the consequences of too-low inflation and began laying the groundwork for the possibility of zero rates last year, when many people thought rate hikes were surely the next step. Lowe also tried to steer the public toward the idea that something more might also be needed, be it QE, yield-curve control or negative rates.
Thursday's actions were a vindication of Lowe's foresight. But the crucible arrived far sooner, because of a public-health emergency, than anyone could have anticipated.
With the Reserve Bank of New Zealand also considering QE, zero rates and unconventional policy — mainstream in Europe, Japan and the U.S. — will now be taken out for a spin in countries that are light on manufacturing and without a long history of big deficits. Perhaps a new kind of antipodean exceptionalism is emerging.
This column does not necessarily reflect the opinion of 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.
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