In 2020, economic red flags point to more downside ahead for the Australian economy. In Q1 of 2020, retail sales and cash register activity plunge to their lowest level since the 1991 recession and houses become more unaffordable, with Sydney and Melbourne being ranked among the world’s most expensive cities for housing. In Australia’s five biggest cities, more than 30% of average earnings are absorbed by mortgage repayments, leading to lower consumption and higher consumer stress.
The Australian economy could get a lift from the improving China credit impulse next year, but it is unlikely to be a game-changer as China’s credit transmission is still too slow. On the top of that, domestic monetary policy is also constrained as the effective zero-bound approaches and has limited positive effects on the real economy. RBA governor Philip Lowe was very vocal in 2019 on the limits of monetary policy and repeatedly explained that further rate cuts have only a marginal effect on GDP growth — arguing that fiscal stimulus is the only way to bring relief if the economy continues to weaken.
As consumer confidence and employment begin to plunge in early 2020, the government decides to embark on a MMT-inspired economic policy aimed at restoring confidence, stimulating GDP growth and attracting investment. This is the largest fiscal stimulus programme in Australia for at least 30 years. It leads to a massive increase in public spending in infrastructure, the health system and education, as well as the implementation of ambitious programmes to reduce the cost of living, provide affordable housing, reduce taxation and address environmental issues.
The strong rise in fiscal spending contributes to a jump in consumption and investment, almost doubling Australia’s nominal GDP rate to 8% in 2020. The business community applauds this bold new economic policy stance. Confidence and risk appetite are back. After being hit by a perfect storm that drove the Australian dollar down nearly 20% versus the greenback since early 2018, the AUD is among the best performing currencies in 2020.