Article Originally Published in the Australian Financial Review on the 29th of August 2019
Written by Kevin Rudd
There is a great complacency emerging in our current economic policy settings. Complacency about the risk of recession. Complacency about long-term economic reform. Both are part of what in recent years has become the complacent country – as if our nation’s future is somehow written in the stars.
Global economic storm clouds are gathering. The US is already 10 years into its current growth cycle – the longest in modern economic history. Markets are anticipating a correction. The stimulatory impact of the Trump administration’s tax cuts has already washed through.
The Fed has historically low interest rates and there’s general consensus that the classical utility of monetary policy to further stimulate economies has been exhausted; and that the non-classical approach, through quantitative easing, used extensively by the US, Japan and Europe, has also run its course.
Another significant headwind is growing geopolitical risk. Protectionism, particularly between the world’s two largest economies, China and the US, is having a profound impact on business and investor confidence across the globe. Markets are factoring in the broader impact on global trade where growth is slowing, acting now as a net drag on the international economy.
Then there’s the bewildering array of tweets, statements and threatened executive actions by the US President, coupled with Chinese retaliatory action which, notwithstanding yesterday’s dialling down of the rhetoric, are shredding market sentiment.
That’s before we factor in other risks including Brexit, the looming Italian sovereign debt challenge, the impact of US-Iran relations on oil supplies, as well the denouement of the North Korean nuclear program. Geopolitical risk is creating an all-pervasive anxiety across financial markets, investors and traders.
Chinese growth is also likely to be depressed from the direct impact of the trade war as multinationals increasingly offshore manufacturing to south-east Asia to avoid US tariffs. This has compounded declining domestic business confidence already brought about by problematic policy settings for Chinese private firms.
The risk of recession in Australia next year is therefore real. The question for government is, are they prepared to prevent it?
Australia should reflect carefully on the lessons from a decade ago when we last faced such a challenge: which of those conditions still exist, which are different, and what new approaches may be necessary. In 2008-2009, we faced the reality of a global financial crisis, collapsing financial institutions, global recession and the possibility of a second global depression. In response we:
- undertook unprecedented fiscal policy intervention;
- used major monetary policy stimulus;
- implanted radical sovereign guarantees to sustain confidence in financial institutions;
- co-ordinated stimulus strategies with other G20 economies;
- avoided trade protectionism through combined G20 action;
- benefited from continued growth in emerging economies, especially China; and
- were a government politically and psychologically prepared to act when faced with a deep economic crisis, rather than just waiting for the market to mystically “self-correct”.
A decade later:
- there is less fiscal policy room to move across all major economies because of the budgetary impact of the last crisis;
- interest rates are already near zero, meaning traditional monetary policy mechanisms are not available;
- there are new challenges to financial system stability, including the explosion of Collateral Loan Obligations, or CLOs, run by private equity firms rather than banks;
- the G20 is no longer functioning as an effective macro-policy co-ordination mechanism;
- there’s an outbreak of protectionism of the type which the G20 a decade ago explicitly prohibited;
- China has less capacity and political appetite for the scale of fiscal stimulus it did in 2008-2009; and
- the current government, rather than returning the budget to surplus over the last three-six years, as it solemnly promised during previous elections, is now politically obsessed with a 2019-20 surplus, potentially exacerbating any slide towards recession.
The government will claim it’s introduced significant tax cuts, the Reserve Bank of Australia has reduced rates and the Australian Prudential Regulation Authority has relaxed the criteria for bank lending. These, however, are already factored in. The government will require much greater policy dexterity to anticipate and respond to the recession risk.
Canberra will need to use its “special relationship” with Washington to fight protectionism – the new leitmotif of the Trump administration. Canberra must examine new approaches to economic stimulus, including the possibility of issuing transfer payments drawing on the RBA’s own balance sheet, based on work of leading economists including Keynes, Friedman and Bernanke.
And Australia should start behaving like a grown-up in the G20, working with others to make it function as the systematic, macroeconomic policy co-ordination mechanism it was designed to be when we created it during the last crisis.
Assuming Canberra can avoid recession, now a one-in-three risk for 2020, it must also act to reform an economy that has at best been bumping along the bottom for the last five years with negligible productivity growth. For example: real small business tax reform to encourage new business formation; mandating a sub-percentage of superannuation fund investments to venture capital equity supporting Australian technology start-ups; a radical reinvestment in STEM across the education system; resolving Australia’s need for competitive, cleaner energy by the reservation of natural gas for domestic needs; giving Infrastructure Australia necessary financial capacity through bond raisings; and a political recommitment to long-term, large-scale migration to deal with the ageing of the population.
Australia’s long-term economic growth is not a given. It has to be earned. By the concerted efforts of our creative innovators and entrepreneurs, our hard-working families – as well as focused government policy to underpin our immediate and medium term growth challenges.
Kevin Rudd was prime minister of Australia from 2007-2010 and in 2013. This is based on a Melbourne University lecture entitled: The Complacent Country – Alternative Visions for Australia’s Economic Future.