Australia's Biggest Economic Stimulus Since 2009 Isn't Working
Grim reports this week showed Australian firms and households deep in the doldrums.
(Bloomberg) --
Australia’s economic stimulus cannon is firing blanks.
Recent back-to-back interest-rate cuts and tax rebates delivering up to A$1080 ($744) to households across the country should see the economy flying -- especially with the population adding 400,000 people last year.
But these aren’t normal times: Grim reports this week showed Australian firms and households deep in the doldrums, with little sign that recent Reserve Bank and government efforts are set to change that. Earlier data showed that retail sales actually went backwards in July.
“Retailers are not seeing this money coming through the way they thought they would,” said Gerry Harvey, chairman of Harvey Norman Holdings Ltd., one of the country’s biggest sellers of electronic goods and furniture. “We’ve got stores that are doing a bit better, but most of them are not.”
With the RBA’s cash rate now at a record-low 1%, economists are betting the central bank will be forced to deploy unconventional monetary policies next year unless the government significantly lifts fiscal stimulus. Treasurer Josh Frydenberg has so far been holding out as he tries to meet an election pledge to produce the first budget surplus since the financial crisis.
Indeed, it was fiscal 2009 when the government last injected major stimulus via cash handouts, causing retail sales to soar. But back then Australia was prosperous and enjoying rising incomes. A decade later, the nation is creaking under record household debt and stagnant wages and worried about job security, meaning people will more likely save any cash windfalls.
A Lifeline?
Frydenberg might find he has some room to move. The government is projecting a budget surplus for the fiscal year through June 2020; however, an unexpected spike in key commodity prices might mean it’s already returned to the black. If it does -- and final figures are due this month -- that would allow him to tell the electorate that he’s met his pledge, opening up the option of injecting more cash into the economy.
UBS Group AG estimates the government’s tax refunds are worth just 0.6% of household income -- far smaller than the financial crisis stimulus of 2.8% of income. Its analysts last week warned that “the economy’s starting point keeps getting materially worse,” noting that second-quarter real GDP and consumption are the weakest since the financial crisis.
National Australia Bank Ltd., which runs the monthly business sentiment survey, sees the RBA cutting to 0.5% in February. If the government fails to provide more stimulus, it sees rates going to 0.25% by mid-2020 and the central bank turning to unconventional policies.
Harvey says Australian businesses are hamstrung. They want to see wages go up because that’s key to supporting consumption and in turn their businesses, but they’re suffering and as a result are looking to cut costs rather than put them up. He doesn’t see a simple solution.
“What’s happening to us is happening in Europe and America,” the retailer chief said. The RBA doesn’t “want to go down to zero, but their hand’s being forced. But we’re having a chat about solving something that no one in the bloody world can do.’’
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Michael S. Arnold
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