Government massages the messengers on the economy, as RBA indicates a deeper malaise

Yesterday furnished a nasty little lesson in why, despite Australia facing its worst economic crisis in 85 years, neither the government nor the legacy media are interested in being completely honest with us about it.

All the major newspapers ran much the same thing on their front pages — that the economy was losing $4 billion a week from the pandemic lockdown, a figure handed to them by Treasurer Josh Frydenberg, who was delivering a speech to the National Press Club at lunchtime.

As is the way of these things, Frydenberg’s office had handed the speech to journalists the day before.

None of the journalists interrogated the figure, which amounts to an annual 10% contraction in GDP.

And perhaps because $4 billion doesn’t sound particularly big, Frydenberg — presumably in order to scare more people into downloading the government’s surveillance app —  said “this is equivalent to around what 4 million Australians on the median wage would earn in a week”.

He liked that comparison enough to repeat it.

The papers ran that, too.

So, does that mean that 4 million Australians are out of work? Well no, because ABS data shows only about one million people have lost their jobs. Frydenberg’s comparison was meaningless.

Still, there was the rest of the speech, wasn’t there? Except, the rest of the speech was just an exercise in self-congratulation.

Frydenberg spoke about the government’s efforts to rein in the pandemic and boost the economy (including, en passant, a blatant lie that the economic growth had been rising at the end of 2019).

There were no fiscal or economic forecasts of the pandemic impact — you’ll have to wait til June for that. Or even a statement on the economic impact — that’s next week.

To determine exactly what Frydenberg’s speech really was about you’d have to go back to the media reports to discover it was about getting Australians “back to work”, a message undoubtedly not lost on the people who, despite the absence of journalists and cameras, are still queueing up outside Centrelink offices in Sydney.

We had to wait until 2.30pm to get a better indication of the state of the economy — from the Reserve Bank, which held its usual monthly meeting yesterday.

Governor Philip Lowe’s post-meeting statement, which inevitably announced no change to the current minimum interest level, also anticipated Friday’s quarterly Statement of Monetary Policy, which will update the bank’s economic forecasts for the first time since February.

The guts of the RBA’s forecasts: GDP “falls by around 10% over the first half of 2020 and by around 6% over the year as a whole. This is followed by a bounce-back of 6% next year.”

That’s the optimistic bit.

But “the unemployment rate peaks at around 10% over coming months and is still above 7% at the end of next year” unless people work fewer hours.

And, “inflation remains below 2% over the next few years … it is expected to turn negative temporarily in the June quarter, due to falls in oil prices, the introduction of free child care and deferrals of various price increases. Further out, in the baseline scenario inflation is 1% to 1.5% in 2021 and gradually picks up further from there.”

That’s why Lowe has repeatedly made it clear there’ll be no move in interest rates for three years at least. And even under the bank’s relatively rosey scenario for GDP growth, unemployment will still be at painfully high levels going into 2022.

Think about what that means for fiscal policy: while the government will be furiously withdrawing stimulus from the economy because of its vast debt, it will still be faced with intractably high unemployment, and pressure to address that with more spending.

The stimulus debate has been in abeyance since the government’s third and very welcome rescue package was announced. But it is not finished.

In the United States, Federal Reserve chair Jay Powell has already said that extra stimulus will be needed for that economy. Overnight his vice chair Richard Clarida told CNBC that “more policy support will be needed from the Fed and possibly also fiscal policy.” We need to start hearing the same from the government.

The other matter Lowe mentioned was that the RBA was going to widen the securities it accepts for its “repo” operations, where it in effect lends money overnight, or for short periods, to banks to enable interbank settlements, in exchange for securities.

Instead of just accepting federal government and state government bonds, it will also accept high quality bonds issued by companies, something Lowe has previously said the RBA wouldn’t do.

The corporate bond market, through which corporations can raise money without issuing shares or taking direct loans, has been in effect frozen since the crisis broke out.

That hasn’t been a particular problem, because the RBA has committed to supporting liquidity in the financial system and encouraging bank lending to business at very low interest rates.

But in deciding that it needs to give the corporate bond market a heart-starter, the RBA appears to be signalling it is worried about the impact of a lack of finance on corporations struggling to make it through the crisis, and the inability or unwillingness of banks to support them.

It’s a small but significant sign that this crisis could yet be much more severe than many in the media, and in the government, appear to believe.