Macro (Re)view (6/3) | Global easing ramps up

As the coronavirus continues to spread across the globe, the humanitarian and economic impacts continue to mount leaving policymakers scrambling to respond. As recently as last Friday, officials from global central banks had indicated they would be taking a measured approach on the basis that it was not clear what the scale and duration of the impact would be on their respective economies. A week later, global central banks are now in the midst of a broad-based easing cycle and if market pricing is used as a guide, that will result in rates being lowered to or near their effective lower bounds in a range of economies.

For context, the OECD this week released forecasts that showed the coronavirus was expected to take 0.5ppt off global growth in 2020, falling from 2.9% to 2.4%, with the risk that the effects are larger still if the outbreak proves to be more persistent and intense than the group currently predicts. Of course, the efficacy of monetary policy to deal with a once-off exogenous growth shock is limited, but it still has a role to play in terms of preventing financial conditions from tightening in the interim and then in ensuring that rates are at an accommodative level to enhance the eventual recovery. On Tuesday, for the first time since the days of the financial crisis in 2008, the US Federal Reserve announced an inter-meeting rate cut, lowering the fed funds rate by 50 basis points to 1.0-1.25%, with the Committee's decision statement noting that "the coronavirus poses evolving risks to economic activity". In the post-meeting press conference, Committee Chair Jerome Powell explained that "the risks to the US outlook have changed materially" and that it will "continue to closely monitor developments" and "use our tools and act as appropriate to support the economy". An additional 50 basis points of rate cuts by the FOMC have been priced into the market for its upcoming meeting on 18 March. Also cutting rates by 50 basis points this week was the Bank of Canada, with its Governing Council standing ready to ease further if needed to support economic activity.   

Over in Europe, a statement from European Central Bank President Christine Lagarde was taken by markets as a clear sign that the Governing Council was preparing to ease its monetary policy settings at its meeting next Thursday, though given its deposit rate stands at -0.5% there has also been speculation that it might instead opt to introduce a new lending facility on more favourable terms than in the general marketplace for small and medium-sized enterprises impacted by the coronavirus outbreak. For the Bank of England, the situation may be a more straightforward one as it has the conventional policy space to cut rates with the bank rate standing at 0.75%. 

In this environment, the shift to easier monetary policy stances is not surprising. What markets are wanting is signs of support from fiscal authorities, though progress on this front remains slow, with a lack of follow-through to date from a statement released by G-7 Finance Ministers that outlined they were "ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase". Responses that markets are looking to see are around ensuring countries boost resourcing to their health care systems to contain the severity of the spread of the coronavirus and policies that are targeted at firms in impacted sectors to navigate their way through this upcoming period of disruption such as with tax breaks and lending programs.   

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Turning to the Australian perspective, the domestic economy closed out 2019 with subdued momentum ahead of the forthcoming disruptions in Q1 from the coronavirus outbreak and summer bushfires, placing it in a somewhat fragile position. This week's National Accounts showed that GDP growth in Q4 was 0.5%, slightly stronger than the 0.4% outcome anticipated, with the annual pace lifting from 1.8% to 2.2% but remaining well below trend pace of around 2.75% (for our full review see here). The overall theme was that domestic demand growth is still subdued (0.1%qtr, 1.3%yr) and continues to be centred on public demand (0.1%qtr, 5.1%yr) as weakness in private demand persists (0.1%qtr, 0.1%yr). Continuing to weigh on private demand is slow growth in household consumption with the response to 2019's monetary and fiscal stimulus measures yet to come through, the downturn in the residential construction cycle and an absence of business investment (see chart of the week, below). Over the past year, public demand, including spending and investment by governments, was the leading contributor to activity adding 1.2ppts to GDP growth, which compares to just 0.1ppt from private demand. External trade bolstered the domestic economy through this period with net exports contributing 1.1ppts to activity, but this is now set to rollover given the disruptions to trade caused by the coronavirus, most notably with China, significantly impacting on the domestic tourism and education sectors. 

Chart of the week

To highlight the extent of the shock likely to be forthcoming, officials from the Reserve Bank of Australia and Federal Treasury revealed this week that their preliminary analysis had suggested that the coronavirus would take in the order of 0.5ppt off GDP growth in Q1, while the drag from the bushfires was likely to be around 0.2ppt. With a material risk of a negative quarter of growth in Q1, the outlook for 2020 as a whole has also taken a hit, with the OECD downgrading their outlook for national GDP growth in 2020 from 2.3% to 1.8%. The high-frequency data for January released through the week was generally soft and pointed to the risks ahead. Building approvals were volatile falling by 15.3% in the month as unit approvals pulled back after recent strength (reviewed here), and while that was likely to have been accentuated by seasonal factors, weakness in residential construction activity is expected to persist well into the second half of 2020. The nation's trade performance held up in January as the trade balance came in little changed at $5.2bn (reviewed here), though weakness on the export side (-2.8%mth) is set to intensify as the coronavirus hits inbound tourism and the education sector, while subdued domestic demand conditions remained a headwind for imports (-2.8%mth). Retail spending was wound back by 0.3% in January as the bushfires and smoke haze kept people indoors, with annual growth coming down from 2.6% to 2.0% to be at its slowest pace in more than two years (reviewed here).

Ahead of a likely and more material deterioration in the data flow, the Reserve Bank of Australia announced a 25 basis point cut in the overnight cash rate to 0.5% at the Board's March policy meeting this week (reviewed here), with the decision statement from Governor Philip Lowe outlining that this decision had been taken "to support the economy as it responds to the global coronavirus outbreak". The Board also retained its explicit easing bias and is prepared to lower the cash rate further, a move that is fully discounted in market pricing by May, taking the cash rate to its effective lower bound of 0.25%. Thereafter, its focus will turn to unconventional policy options. Were the Board to have been resistant to the global shift to easier monetary policy stances, the exchange rate would have been at risk of appreciating, becoming a headwind for the domestic economy and further delaying progress in meeting their employment and inflation objectives. On the fiscal side, the Federal government is likely to come through with measures targeted at supporting businesses in the sectors of the economy most impacted by the coronavirus to ease cash flow concerns over the period of disruption.