Quantitative Easing

Australia’s GDP signals a recovery, but can it handle the shrinking stimulus?

Ah, a throwback to the heyday of pre-Covid single-digit growth. One can only hope that the Australian model of overt complacency and complacency does not follow, as navigating towards the exit of the stimulus will require a great deal of humility.

The country has successfully emerged from its pandemic-induced economic hole, recording gross domestic product growth of 1.8% in the first quarter compared to the last three months of 2020, the government reported on Wednesday. Although down from the revised 3.2% fourth-quarter clip, the number was better than expected and put activity above levels seen before the coronavirus outbreak, the agency said. statistics in a statement accompanying the numbers.

This milestone is a reminder of the days past after the turn of the century, when Australian politicians and leaders thought they had it all figured out. The country appeared to have devised a magic formula – based on the standard of living of developed countries, in a region dominated by vibrant emerging markets – that has helped it navigate recession-free for nearly three decades.

The latest figures come a day after the central bank hailed the recovery and signaled that it decide next month on the fate of quantitative easing, as well as its policy of capping the yields of certain government bonds. Some deviation from this extraordinary level of support – seen as a marginal possibility before the pandemic – is needed, given the success of the recovery. The Reserve Bank of Australia could choose to keep quantitative easing in an abbreviated format, while removing what’s known as the yield curve control, which aims to keep rates on three-year sovereign debt. close to zero. It would show some confidence in testing the waters on housing retreat without jumping too far into the unknown.

The hesitation is justified. Inflation is far from stabilizing within the RBA’s 2% to 3% target range, and such a dramatic break with last year’s policies would likely cause the Australian dollar to strengthen excessively. Officials are also concerned about the vitality of the labor market.

By the Reserve Bank’s own admission, the rebound was helped by fiscal and monetary caffeine. Prime Minister Scott Morrison is not about to stifle spending in his government’s budget released last month. Morrison’s Conservative bloc, once obsessed with surpluses, deficit until at least 2025. The prospect of national elections within a year makes its dismantling doubly improbable.

Australia now has a largely domestic economy, bolstered by government support but looking inward. The borders are effectively closed. Morrison won’t rush to change that – the recent budget supports tourism and aviation. The underlying narrative appears to be based on the fear that opening up to strangers will trigger another epidemic. This is a particularly acute problem as vaccination is lagging behind many other developed countries.

Australia’s policy of eradication, rather than containment, means that even small outbreaks are quickly followed by city or state closures, inevitably holding back growth. RBA Governor Philip Lowe alluded to it in his statement after Tuesday’s board meeting: “A major source of continuing uncertainty is the possibility of significant virus outbreaks, although this is expected to decrease. as more of the population is vaccinated. The confinement of Melbourne, the second largest city, will be extended beyond the first seven daysa senior provincial leader said on Wednesday. Its population of 5 million is currently experiencing a fourth shutdown. This stop-start pace means that the path to economic normalcy will be slow.

By all means, savor the recovery, Australia. But now is not the time to congratulate yourself. There is nothing unique to the antipodes that will save the country from Covid.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

To contact the author of this story:
Daniel Mousse to [email protected]

To contact the editor responsible for this story:
Rachel Rosenthal at [email protected]

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