Reserve Bank flags years of pain — and the problem is demand, not supply

The Reserve Bank’s message is: the worst is yet to come. We avoided a much worse economic catastrophe by suppressing the pandemic in most areas faster than expected, but Victoria — and the nature of the damage inflicted on the economy already — means we face years of joblessness, stagnation and lost growth.

In governor Philip Lowe’s post-meeting statement yesterday — which anticipates some forecasts from the bank in its quarterly statement of monetary policy this Friday — he revealed the bank sees unemployment at about 10% at the end of the year compared with its 9.5% estimate in May, and higher than the 9.25% estimate in the federal government’s economic update on July 23.

The RBA said the jobless rate would still be around current levels — just above 7% — in a couple of years.

That’s a lot of people out of work, and a lot of households struggling to make ends meet, and a much more pressured financial system in a country with a lot of household debt.

And after consumer inflation fell to minus 0.3% in the June quarter, Lowe said the bank expects it to be positive in the current three months, but: “Beyond that, given the ongoing spare capacity in the economy, inflation is expected to average between 1 and 1.5% over the next couple of years.”

By then we’ll be looking at the prospect of a decade of inflation being routinely below the RBA’s target band.

Lowe has previously made it clear interest rates will be on hold for at least three years.

Now the preferred phrase is that its “accommodative approach will be maintained as long as it is required. The board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band.”

On current forecasts/vague estimates, that is unlikely to be until the mid-2020s. And that progress towards full employment isn’t going to come merely from “accommodative” monetary policy.

As Lowe said yesterday: “The Australian government’s recent announcement that various income support measures will be extended is a welcome development and will support aggregate demand. It is likely that fiscal and monetary stimulus will be required for some time …”

So we’re not done with fiscal stimulus. Not by a long stretch. Not if we want to get unemployment down substantially.

This is an implied rebuke for the supply-siders in the commentariat and even, if you want to be malicious, Treasurer Josh Frydenberg and his Thatcherite fetish. The problem in the economy is insufficient demand, not supply-side problems requiring another bout of punitive “reform”.

Consider, for example, the external side of the economy, once upon a time the prime example of how Australia badly needed industrial relations and productivity reforms.

We just recorded a record trade surplus of more than $76 billion (in original terms) in the year to June, more than double the 2018-19 result and 10 times the size of the 2016-17 surplus.

It’s true that this was partly a function of weak demand in the economy with imports down 5%. That downward trend started in December, before the pandemic (illustrating how stagnant things were before the crisis).

But it mainly reflects that Australia has become an export powerhouse courtesy not just of mining and China’s hunger for our minerals but of education and tourism.

Education and tourism will nearly vanish from our list of exports this year, but iron ore will go from strength to strength on the back of higher prices, driven by a highly innovative, productive and high-tech mining sector (gold will help too, given current prices).

The challenge is to get Australian households confident, secure and spending again, not punishing them with neoliberal fundamentalism in the name of ’80s-era supply-side economics.