More stimulus might be needed

It is unlikely that fiscal stimulus will be able to keep Australia out of recession over March/June quarters and more stimulus may still be needed as the focus eventually moves from protecting the economy to boosting a recovery once the virus is brought under control, according to AMP Capital.

Following the federal government’s announcement of the third fiscal stimulus package on Monday, the firm’s chief economist, Shane Oliver, said the next stimulus might take the form of direct cash handouts to Australian households.

“It won’t stop the virus and it won’t boost spending when people are locked up inside such that they can’t spend as they usually do. But it will help protect the economy from collateral damage by minimising business failures and household defaults and it will help the economy bounce back when the time comes to emerge from ‘hibernation’,” he said.

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At the same time, he said that Australia’s policy moves, including those by the Reserve Bank of Australia (RBA) and federal government, may be starting to get the upper hand in terms tipping the risk scale away from long depression or recession towards the prospect of a rebound in growth once the virus was under control.

“Particularly as the support measures help minimise the collateral damage to the economy allowing the bulk of it to hibernate rather than die through the shutdown which helps explain why the Australian share market rose 7% today, its best gain in 40 years,” Oliver noted.

According to AMP Capital, the bigger fiscal measures to deal with the coronavirus shock would clearly add dramatically to the budget deficit by around $200 billion over the next year and to this needs to be added the hit to public revenue from the economic downturn.

“But this is necessary. If the Government doesn’t provide significant support to match would could be a 10% or so hit to the economy then the economic downturn will be deeper and it will take much longer to recover which will ultimately result in an even bigger hit to the budget,” he said.

The budget blowout may risk a downgrade in Australia’s AAA sovereign debt rating, but ratings were a bit of a relative game and Australia’s public finances would still look relatively better than others, Oliver stressed.

“And I would rather a rating downgrade than a deep depression/recession any day…particularly when any downgrade will have no impact on the Federal Government’s cost of borrowing,” he said.

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