Doubts stimulus is enough to stave off recession


Prime Minister Scott Morrison said the prime aim of the package was to keep people in employment. On Friday, travel company Flight Centre announced it would close 100 of its outlets because of the impact of coronavirus on demand for holidays and travel. The decision was announced before the government urged Australians to defer non-essential travel out of the country.

Analysis by KPMG shows without the government’s package, Australian GDP would have contracted by 0.9 per cent by the end of the year.

With the package, if the instant asset write-off is fully used by businesses, it believes the economy will grow by 0.2 per cent.

KPMG chief economist Brendan Rynne says for the government’s stimulus package to work, small and medium sized businesses will have to spend up big.Credit:chris pearce

KPMG chief economist Brendan Rynne said it was clear the package would assist the economy but much hinged on the continued spread of the virus and how many businesses use the instant asset write-off.

He said small and medium-sized businesses would need to invest more than $30 billion over the next two years to protect the economy from a downturn.

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“This is a significant ask, especially in an uncertain domestic and global business environment,” he said.

“[And] if the pandemic turns out to be more acute and last longer than is currently anticipated then the economic impacts may be significantly greater.”

Trade and investment program director as the US Studies Centre, Stephen Kirchner, said the stimulus package was necessary, adding it left spending and saving decisions to the private sector.

But he was critical of the Reserve Bank, saying it should cut rates by 0.25 percentage points well before its next meeting on April 7 and announce quantitative easing measures.

“Fiscal policy is a slow and leaky bucket compared to monetary policy,” he said.

“The big concern I have is that it will ease pressure on the Reserve Bank to act more decisively than it has to date. Inflation expectations are collapsing, indicating the RBA is not doing enough.

“If Australia goes into recession, it will be due more to the RBA than fiscal policy.”

The Reserve had to intervene in the nation’s financial markets on Friday, injecting $8.8 billion in response to “dysfunction” in the US treasuries market.

The money, well above the $3.4 billion thought necessary, was loaned for periods ranging from 17 to 95 days.

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There remains no signs of trouble to the general financial system, as occurred during 2008-09, with banks still in good health.

University of Western Australia professor of finance, Raymond da Silva Rosa, said a key part of the stimulus package depended on businesses using their assistance to keep on staff.

He said that while this might keep staff employed, it did not necessarily mean they would get an economic boost.

“There is a place for stimulus, even if its to ensure things don’t get worse, and the government has heeded that advice,” he said.

But UBS senior economist George Tharenou said even with the stimulus, the country will still fall into recession.

He said there was every chance unemployment, currently 5.3 per cent, could head towards 7 per cent.

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