Analysis: Morrison’s Two Smart Steps Have Potential to Beat RBA’s Baseline Scenario

By Sophia Rodrigues

There is no doubt that restrictions in economic activity to contain the spread of coronavirus is hurting the Australian economy considerably but the economy could bounce back faster and better than the Reserve Bank of Australia’s baseline scenario because of two smart moves by the government earlier.

The first is the ban on open real estate auctions and open house inspections, and the second is the JobKeeper Policy. These actions are in addition to several other support measures by the government, including to flatten the coronavirus curve,  and unprecendented monetary policy decisions by the RBA.

AVOIDED SHARP HOUSE PRICE FALL

It is interesting that the measures related to the housing market was announced less than two weeks after Prime Minister Scott Morrison announced the first stimulus package for the economy. While it seemed the decisions were related to social distancing measures, the true motive was likely to prevent housing prices from falling sharply.

With no open auctions and no viewings, the housing market is as good as shut, and that would dissuade any sellers from listing the property. This is exactly what has happened in the last few weeks. Housing activity has fallen sharply and instead of prices falling, they have risen slightly amid low volumes.

The ban has now been lifted in New South Wales and partly in Queensland but Victoria has still not made any announcement yet.  Irrespective of the actual timing of the lift in restrictions, one thing is clear – the initial worry and uncertainty related to the coronavirus is now a past. Both buyers and sellers in the housing market can now make their decisions based on the outlook for the economy, their own financial situation and the low interest rates, rather than reacting in a panic.

Housing prices could rise or fall from here, but the decision to ban activity in the initial stages of the pandemic has ensured there won’t be any sharp fall. That would be a big positive for the housing market, and without a doubt a very smart move by Morrison and his team.

Housing prices and overall housing activity are important for outlook for consumption, and for dwelling investment, and thus the economy.

FIVE STARS TO JOBKEEPER POLICY

Morrison’s Jobkeeper policy is another brilliant move to support the economy. While countries like the New Zealand and the UK also have announced wage subsidy like Australia, the key difference is the amount is flat A$1,500 a fortnight in Australia, irrespective of how much a worker earned.

The flat payment is benefitting low income earners and part-time workers but this cohort is the one that is more likely to spend the entire amount. For some, the amount is a windfall which would be spent on discretionary items.

The effect of Jobkeeper policy is that workers will remain attached to their employers and would be counted as employed in the labor force survey. This will ensure Australia’s jobless rate would not rise beyond 10%, and that is important to maintain confidence in the economy.

There’s also a bigger benefit. Because the government is paying wages of employees, businesses will be more confident to re-start activity once the restrictions are lifted.

In fact, because Australia never defined “essential,” many businesses are allowed to operate but chose not to because of low activity. Such businesses have already started operating because no wage cost means their variable operating expense is low.

Some of these businesses now have an opportunity to make some savings if they make decent sales, which will lead to an improvement in their financial situation and could be used for investments when the economy improves in future.

Morrison’s Jobkeeper Policy is, therefore, not just the government’s welfare policy. It has significant implications for consumption and activity in the economy, and ensures the economy is well-placed to reap the benefits when restrictions are lifted.

--Contact: sophia@centralbankintel.com