When the End of Economic Perfection Spells Revolution

(Bloomberg Opinion) -- These are the most consequential months in the Reserve Bank of Australia's 60-year life, but the economic downturn of historic proportions means nobody is celebrating this diamond jubilee.   

So deep is the damage inflicted by the Covid-19 pandemic that the central bank's greatly enhanced profile in the economy and markets will be with us for years. That's consistent with a tremendous expansion in the role of the state as leaders Down Under endeavor to simultaneously restore growth and contain infections. The combative relationship between the federal and powerful provincial governments has given way to national priorities, blurring distinctions between responsibilities. 

In effect, the modus operandi of what was once seen as an economic nirvana has undergone a revolution. Projections suggest much of this is warranted; that makes it no less momentous. Gross domestic product may shrink 10% before bouncing in the second half of the year, the central bank warned Friday in its quarterly outlook. The late growth spurt won't be enough to prevent an annual retreat of 6%. 

Australia’s GDP hasn't gone south by anywhere near that much since the RBA opened its doors in early 1960. Prior to the central bank’s inception, monetary policy was conducted by the government through what’s now the publicly traded Commonwealth Bank of Australia. The last recession produced a decline of 1.1% in 1991, which seemed severe living through it. The growth streak that followed has gone down in global economic folklore. Buoyed by closer trading ties with China and an unparalleled resources boom, Australia even skated through the Great Recession without two consecutive quarters of contraction. 

That’s over. The unemployment rate will climb to 10% over coming months and still exceed 7% at the end of next year, under the RBA’s main scenario. It was 5.1% at the end of 2019. The profound shock of the pandemic quickly pushed the bank to cut borrowing costs to almost zero and undertake quantitative easing to suppress the yield on government bonds. Governor Philip Lowe signaled that ultra-easy policy will remain until the country is well down the recovery road. The RBA is also purchasing bonds sold by state governments, saying Tuesday that it will further expand the range of securities eligible for its market operations to include investment-grade debt issued by non-bank companies. 

While the bank makes its monetary-policy decisions independently, this effectively leaves the six state and two territory administrations more dependent on national authorities and extends the reach of the public sector into corporate life. The former diminishes, at least temporarily, pretensions that local administrations have of separation from the center. The latter is a step toward reversing the intellectual and policy thrust of successive governments since the 1990s, when assets like Qantas Airways Ltd. and Telstra Corp. were unloaded.

This rebellion against precedent extends to the political process. Prime Minister Scott Morrison has created a so-called national cabinet to deal with Covid-19. The team of rivals brings state premiers and chief ministers into the federal sanctum, meeting to co-ordinate on business and school closures and prospective re-openings, as well as hospital operations. During the emergency, this elite group has become the core Australian decision-making body. Several of the regional premiers are from the Australian Labor Party, which opposes Morrison’s conservative bloc in the federal parliament. To appreciate the radicalism, imagine Donald Trump bringing New York’s Andrew Cuomo and California’s Gavin Newsom, both Democrats,  to the cabinet table in Washington. 

An effort at seamless decision making addresses the needs of the moment. The public rightly has little time for jurisdictional disputes, even through the constitution gives states a lot of authority. Critics contend that the new set-up is eroding democracy: The national cabinet makes decisions, yet is accountable to no single legislature. Such unity of purpose likely has a finite life. At some point, the electoral cycle  will resume. 

Templates for new national political and economic structures now exist that would have unthinkable a year ago. Catastrophic bushfires over the Christmas-New Year holiday period midwifed a big federal intervention in firefighting, an area states have historically dominated, and led to the biggest military deployment since World War II.   

In the monetary arena, the ground has been laid for long-term policy activism and rock-bottom rates with potentially far-reaching consequences. Consumers, businesses and governments now know the RBA will backstop them in ways few contemplated not so long ago. And the longer Lowe and his successors keep rates low, the greater the risk of a backlash should they have to change course and begin withdrawing stimulus — an antipodean taper tantrum. 

Not the anniversary year the RBA anticipated. 
 

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.

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