While media outlets like the Financial Review used Reserve Bank governor Philip Lowe’s economic update yesterday to justify their calls for full-blown neoliberalism, the real message of the governor’s speech — delivered online, as everything now is — was about the disturbing lack of certainty about what we’re doing now and its likely impacts.
The bank’s guess that is the economy will contract about 6% this year and grow by 6-7% next year, and unemployment will hit 10% and hours worked will fall by 20% before things start improving.
But: “whatever the timing of the recovery, when it does come, we should not be expecting that we will return quickly to business as usual. Rather, the twin health and economic emergencies that we are experiencing now will cast a shadow over our economy for some time to come,” Lowe warned.
Part of that “shadow” is that we’re not sure exactly what changes will result. “It is highly probable that the severe shocks we are now experiencing will change the mindsets of some people and businesses,” Lowe said, and that these will not immediately change the moment restrictions are lifted.
“We are all learning to work, shop and travel differently. Some of these changes will probably stay with us, requiring a rethinking of business models.”
We don’t know to what degree these changes will stick. Will every firm that is reliant on its staff working from home revert to office-based operations? Will there be a permanent shift from work travel to teleconferencing?
Will our recent shift from conspicuous consumption to experiential consumption — fewer clothes and home furnishings, more restaurants and travel — go into reverse?
No one knows. And the answers to such questions will come on top of the changes that we know will happen — to aviation, to tourism, to immigration.
There will also be a higher level of debt and some households might revaluate the risks of having highly leveraged balance sheets in a less certain employment environment.
Another uncertainty is the length of lockdown. At the moment, we’re looking at a pretty optimistic scenario, given the success of governments in curbing infections.
But we’ve seen in Japan and Singapore what can happen if we remove restrictions too early. So Lowe prefers to talk in the context of different scenarios, which yield very different outcomes.
He doesn’t say it, but a scenario in which lockdown is lifted, the economy begins recovering, and then a new spike in infections forces another crippling lockdown, could be as damaging, or more damaging, than an extended lockdown to which we learn to adjust, and which ends up being lifted permanently.
Lowe also makes an important point about inflation. Despite the government committing to hundreds of billions of dollars in stimulus, you won’t find too many inflation hawks whining that it is going to cause inflation (like they claimed about Labor’s GFC-era stimulus).
The large fall in oil prices, combined with the introduction of free childcare and the deferral or reduction in some price increases mean that it is quite likely that year-ended headline inflation will turn negative in June. If so, this would be the first time since the early 1960s that the price level has fallen over a full year. In underlying terms, however, inflation is expected to remain positive.
Just how positive remains to be seen.
In the longer term, it will be the collapse in domestic demand from consumers that does the damage to underlying inflation and the way the slump in oil prices embeds itself in the wider economy over time.
Disinflation could become a fact of life for some time, which could breed its own, self-perpetuating problems for consumption. And it all means that — in news that will comes as a surprise to no one — minimum interest rates are here to stay for a long time.
There’s one area where Lowe is optimistic. “With many firms delaying or cancelling wage increases, year-ended wage growth is expected to decline to below 2%, before gradually picking up again,” he says.
Given the RBA’s woeful record of wages predictions over most of the last decade, we’ll believe that when we see it.