Following the recent release of the quarterly economic growth figures, we have witnessed the most bizarre economic commentary in decades. Australia’s barely positive growth rate has been greeted with howls of protest that this was achieved only through government spending. Those commentators were furious with governments for preventing a recession.
Recessionistas insist a recession is essential. Why? Because their historical analysis and economic models tell them so. They persist in accusing the Reserve Bank of not wanting to ruffle political feathers as the explanation of why their view isn’t being lauded at Martin Place. Some Recessionistas demand further cash-rate increases, presumably to bring on the recession they seek.
There was a time when governments were expected to use fiscal policy to prevent a recession. At the onset of the Global Financial Crisis the Rudd government and its treasurer, Wayne Swan, deployed a large fiscal stimulus that kept Australia – virtually unique among developed economies – out of the Great Recession of 2008-09.
The Morrison government committed massive fiscal spending to mitigate the looming Covid-19 recession, which caused the recession to be short.
Nowadays, the Albanese government’s decisions to increase rent assistance and provide modest assistance with electricity prices and child care costs are being condemned as irresponsible.
In a recent column I defended the speeches of Deputy Reserve Bank Governor, Andrew Hauser, where he criticised others for being so certain about their monetary policy prescriptions. His advice was to follow the evidence.
Yet now, Reserve Bank Governor, Michele Bullock, appears to be ignoring the evidence of a rapidly slowing economy, declaring interest rates will remain high for longer and not ruling out further cash rate increases.
If Governor Bullock is seeking to dampen inflationary expectations with these statements, then that’s fine, but if the Reserve Bank’s view remains that the economy is running too hot then we’re in big trouble.
Before Governor Bullock made her statement, Australia’s treasurer, Jim Chalmers, made an unremarkable statement of his own – that high interest rates were smashing the economy. For this he was condemned by former Reserve Bank board member, Warwick McKibbin and former prime minister, John Howard.
Chalmers has responsibility for economic policy in the Australian government. Is he to have no view about the effects of high interest rates? In commenting on the weak economic growth figures, he didn’t criticise the Governor.
Hauser’s exhortation for everyone to follow the evidence and not dogma is prescient.
Yet the RBA’s forecast in early August was that household consumption for the June quarter would grow by more than 1 per cent, but it grew by less than half that rate. And the RBA forecast was for household disposable income to grow by 1.1 per cent, but it contracted by 0.3 per cent.
These are big misses. Faced with them, how can the Reserve Bank sustain its argument that the economy is running too hot?
Governor Bullock has claimed that the alternative to high interest rates is a recession but didn’t acknowledge that the consequence of persistently high interest rates is a recession.
One of Australia’s greatest strengths is that we live in a robust democracy. My disagreement with some of the statements and forecasts emanating from the Reserve Bank will be condemned by those economists who demand a recession.
Recessionistas who accuse the Reserve Bank of kow-towing to the Albanese government appear to be setting the stage for fierce criticism in the coming election year if the Bank’s board decided, based on the data, to cut the cash rate.
As deputy chair of the parliamentary economics committee in 2007, I asked Reserve Bank Governor, Glenn Stevens, if the data so indicated, would he increase interest rates in a pre-election period. He responded that it would be irresponsible not to do so. True to his word, the data so indicated, and he increased the cash rate.
If the Reserve Bank refuses to reduce interest rates later this year, it will come under enormous pressure from Recessionistas and their political allies to keep them high next year through to election day, at great cost to everyday Australians and small business owners.
Governor Bullock and Deputy Governor Hauser have assured us repeatedly that they will follow the evidence. Let’s hope they put their models aside, ignore the Recessionistas and follow the leading economic indicators. Those indicators are pointing to a slowing in inflation and an economy on the precipice of recession.
Craig Emerson is managing director of Emerson Economics, director of the APEC Study Centre at RMIT University and adjunct professor at Victoria University’s College of Business.