Australia’s economy beyond this month, the Reserve Bank deputy governor has warned. Photograph: Joel Carrett/EPA
Monetary policy is powerless to fix the supply-side problems caused by coronavirus, which is estimated to wipe 0.5% off Australia’s output in the March quarter alone through its impact on education and tourism, the Reserve Bank has warned.
The RBA’s deputy governor, Guy Debelle, told the Australian Financial Review business summit on Wednesday that it was “too uncertain” to assess the virus’s impact beyond March, with supply chain disruption set to hit the construction and retail sectors in particular.
Debelle argued that low interest rates would help boost the Australian economy and said the anticipated stimulus package “will provide welcome support”, noting the government’s “intention to support jobs, incomes, small business and investment”.
The RBA called for federal stimulus as early as last July, well before the coronavirus and bushfire season that Treasury estimates are set to wipe 0.5% and 0.2% from gross domestic product.
For months the government resisted the call for extra stimulus before providing an additional $3.8bn for infrastructure in November. This week it is expected to announce a package based on a new business investment allowance, a financial boost for pensioners through changes to deeming rates, and support for small and medium-sized businesses and a tax break for some households.
On Wednesday Debelle highlighted the government’s anticipated stimulus package, suggesting that after it was implemented “the combined effect of fiscal and monetary policy will help us navigate a difficult period for the Australian economy”.
“They will also help ensure the Australian economy is well placed to bounce back quickly once the virus is contained.”
In his speech Debelle said the Australian economy’s growth of 2.25% in the year to the December quarter confirmed the RBA’s assessment the year would end with “a gradual pick-up”. But the coronavirus had then “significantly disrupted this momentum”, he said.
Production in China had not ramped up after lunar new year and was “only gradually returning to normal” while it was still “very uncertain how long it will take to repair the severe disruption to supply chains”.
“In the meantime, the virus has spread to other countries. They too are beginning to suffer significant disruptions, the extent and duration of which is unknown at this time.
“The conclusion is that the global economy will be materially weaker in the first quarter of 2020 and in the period ahead.”
Debelle noted a 90% reduction in incoming visitors from China, causing an estimated 10% reduction in Australia’s services exports, split equally between the tourism and education sectors.
“As service exports account for 5% of GDP, this translates into a subtraction from growth of o.5% per cent of GDP in the March quarter from these two sources,” he said.
Debelle noted that share prices have fallen by “as much as 20% since their all-time peak of less than a month ago, although the Australian market rebounded on Tuesday”.
Exchange rate volatility had increased but “remains considerably lower than volatility in other financial markets”, he said.
Debelle said Australian banks were “well capitalised and is in a strong liquidity position” and the RBA had “not seen any particular sign of pressure in our daily market operations to date”.
He said the RBA had cut interest rates to a record low of 0.5% last week “to support the economy by boosting demand and to offset the tightening in financial conditions that otherwise was occurring”.
“The virus is a shock to both demand and supply. Monetary policy does not have an effect on the supply side, but can work to ensure demand is stronger than it otherwise would be.
“Lower interest rates will provide more disposable income to the household sector and those businesses with debt.”
Debelle said the effect of coronavirus “will come to an end at some point”, and the Australian economy would then “be supported by the low level of interest rates, the lower exchange rate, a pick-up in mining investment, sustained spending on infrastructure and an expected recovery in residential construction”.
In addition to interest rate cuts, Debelle confirmed the RBA may use unconventional monetary policy such as quantitative easing, suggesting the bank would “act in the government bond market as necessary”.
“There are scenarios in which we are certainly going to have to consider that – absolutely,” he said in answer to a question.
Earlier, Anthony Albanese noted that Labor had been calling for the government to provide fiscal stimulus through measures including accelerated tax cuts, business investment and a boost to Newstart.
The opposition leader told the AFR conference that the Rudd government’s stimulus package was “revered” internationally but the Coalition was “dismissive” of the fact that Labor helped avert a recession in Australia during the global financial crisis: “Never forget they voted against the stimulus plan in the parliament.”
Albanese promised Labor would “continue to be constructive and provide expedited support through the parliament for any reasonable measure that restores confidence, increases economic activity and keeps people in jobs”.
Scott Morrison has said the coronavirus could have a bigger impact on the Australian economy than the GFC and has said the stimulus would be delivered through existing payment systems, with measures both scaleable and temporary to enable a fiscal exit strategy.
The treasurer, Josh Frydenberg, has said the government will use the tax and transfer system to get financial support to Australian households as quickly as possible, despite the finance minister, Mathias Cormann, appearing to rule out Rudd-style cash payments.
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