Consecutive interest rate cuts and fiscal stimulus have left Australia little “wriggle room” to revive the economy in the event of a further downturn, Deloitte Access Economics has warned.
In its latest business outlook report, released on Monday, Deloitte says Australia’s economic slowdown appears “well contained” with national income growth on track and stimulus arriving fast in the form of income tax reductions, rate cuts and looser lending rules.
The relatively rosy assessment follows a meeting between the Reserve Bank governor, Philip Lowe, and the treasurer, Josh Frydenberg, on Thursday, at which Lowe tempered his earlier warnings that the government must do more to stimulate the economy.
Australia’s economy grew just 0.4% in the March quarter, contributing to a 10-year low annual growth rate of 1.8%, and two consecutive cuts – of 25 percentage points each – in the cash rate by the RBA in June and July.
Deloitte attributed the economic slowdown to falling house prices and the drought, but noted that national income growth remained at its long-term average because of higher coal and iron prices.
It said the RBA was cutting rates not just because “the economy is slower than it was, but mainly because the economy has been slower than it needed to be” – as it aimed to reduce unemployment from 5.2% to 4.5% to lift wages and push inflation back into the 2-3% target band.
Deloitte said there was “heaps of stimulus” in the Australian economy, including “reduced policy uncertainty” after Labor lost the election, $158bn of personal income tax cuts of which $8bn will be delivered immediately, reduced bank funding costs, a lower Australian dollar and less stringent lending standards for home loans.
“Current conditions are better than many people think,” it said. “And, in turn, that raises an important question – have policymakers fired off too many bullets now, leaving them short of ammo in the event of a more substantial slowdown at some stage?”
It said the cash rate of 1% was “now not much above zero” and because the funding squeeze on banks had eased, a lower cash rate “doesn’t actually save the banking system much money”.
“Or, in other words, we’re starting to run out of wriggle room in terms of the potential to cut the economy’s borrowing costs.
“That doesn’t mean the [RBA] shouldn’t have cut rates. But it does mean that there’s a trade-off in play: the more the [RBA] boosts the economy now, the less it has in its back pocket to boost the economy at some point in the future.”
Deloitte said the trade-off of seeking “greater prosperity and improved social cohesion” by lowering unemployment was that Australia was “taking on greater risk in the event of a future recession”. “We can’t have our cake and eat it too.”
It also cast doubt on the ability of regulators to help create the 200,000 jobs needed to reduce unemployment by 100,000 and push the jobless rate down to 4.5%.
Deloitte said there was a “solid chance” the unemployment rate would never reach 4.5% because printing money was “not terribly effective”, economic reforms were unlikely to achieve quick results and the states were responsible for most infrastructure spending.
This was a “tragedy for those needlessly unemployed and underemployed,” it said.
After the disappointing March GDP figures, Lowe had called for “further investments” in infrastructure to soak up spare capacity in the Australian economy, putting the RBA publicly at odds with the government’s position that existing budget measures were sufficient to stimulate the economy.
But on Thursday, Lowe agreed “100% with [Frydenberg] that the Australian economy is growing”, reframing his earlier calls for structural reform as motivated by a desire to ensure “Australia remains a great place for businesses to expand, innovate, invest and employ people”.
Frydenberg described the government’s $100bn infrastructure pipeline as “very strong”, but warned that there were capacity constraints that prevented existing projects from being brought forward.
