The bushfires make fiscal stimulus an even more urgent task for the Morrison government
Right now investors and economists are trying to work out just how badly the Australian economy will be affected by the bushfires – a task made slightly more difficult because January is usually a time when businesses are still in holiday mode and hiring and other matters are put off until February.
The general estimate from economists is that the bushfires will knock between 0.1 and 0.2 percentage points off the March quarter GDP growth. Certainly that is the view of Janus Henderson’s investment strategist, Frank Uhlenbruch. He also notes that “fiscal policy, rather than monetary policy, is the best policy tool to immediately respond to such events”.
The call for fiscal stimulus was of course present well before the bushfires took hold. The government declined to provide any in the mid-year economic and fiscal outlook (Myefo), and remained committed to its budget surplus.
With the government now committing to spending money to respond to the bushfires, it will be interesting to see if it uses this as an excuse to increase general economic stimulus and use the bushfires as a cover for a possible budget deficit this financial year.
Given the Myefo saw a $2.1bn downward revision in the budget surplus forecast to $5bn it would not take a great deal of reduced economic activity to knock that even close to a deficit.
The recent data suggests the need for economic stimulus remains.
On Wednesday the latest building activity data released by the Australian Bureau of Statistics showed that the commencement of private sector residential building fell another 3.6% in the September 2019 quarter – the fifth consecutive fall:
There is also the continuing rundown of work in the pipeline. The number of buildings with approval but which have yet to begin construction is well off its recent peaks in Sydney and Melbourne:
The latest engineering construction figures, also out on Wednesday showed there is some increase in the work being done for the public sector, but overall engineering work remains flat:
It suggests very much the need for government stimulus and infrastructure spending remains crucial for providing work in the private sector, especially given the recent slowing of government infrastructure spending:
Where things remain somewhat unclear is the household sector.
The latest retail trade figures out last week saw a massive 0.9% increase in retail spending in November. Given this was the biggest one-month increase for three years, it could be the sign that households are starting to spend again.
While I am usually rather sceptical of big increases or falls in seasonally adjusted figures given how erratic they can be, anecdotally I do believe there was a big jump in spending in November:
It is clear now that “Black Friday” sales are a thing in Australia.
The Thanksgiving weekend sales that dominate the US have migrated to Australia, without the turkey dinner and arguments with the in-laws.
That weekend I decided to do some early Christmas shopping and was stunned to discover the complete lack of car parks in a number of department stores around Canberra. It was busier than I could recall it ever being for Boxing Day sales.
Which brings us to the big question. Right now the ABS is trying to work out just how greatly our shopping habits have changed.
If the big boost in November came at the expense of big pre-Christmas and post-Christmas shopping in December, then it is just a blip and nothing more. If not, then we might be able to say that things are looking up.
The reality is that December has become much less important over the past 20 years, and that November has become slightly more important over the past four years:
For non-food retailers, December used to be worth around six and a half weeks of normal shopping; now it is about five and half weeks.
And given there is no evidence that wages have increased by any significant amount in the latter half of last year, there is little reason to think a corner has been turned. More I would suggest the boom in November figures demonstrates that shoppers now realise that shops are not waiting until Boxing Day to drop prices.
Similarly there is little sense that business has become more positive in the latter stages of 2019. The most recent figures from the RBA show that annual business credit growth fell in November to 2.5% – well below the 5% mark that suggests a sound private sector:
And yet despite this, the market is now slightly more positive about interest rates than it was in December.
A month ago the market was pricing in another rate cut to 0.5% to occur by May; now it thinks it will happen only by July.
It would seem the market believes the government will need to respond to the bushfires with increased spending and that this may offset the urgency for another interest rate cut – and yet another rate cut still remains more likely than not.
It is clear that we did not end 2019 with any great sense of economic optimism, and the bushfires will have done nothing to improve that – the budget surplus may remain, but the economy continues to struggle.
Greg Jericho writes on economics for Guardian Australia