Recession in Australia? RBA and Treasury Say Nothing to See HereMichael Heath
Australia’s two premier economic institutions have done no scenario planning or war gaming in the past 12 months on how they would respond if the country plunged into its first recession in almost a quarter century.
The Reserve Bank of Australia and Treasury said they had no research on the potential for a downturn or their possible policy response when asked in separate Freedom of Information requests. The last time Treasury released documents on recession scenarios was in 2014 and that research dated back to 2004.
Australia is experiencing the worst run of growth and wages are increasing at the weakest pace since the 1991 recession. The risks to the outlook stem from slumping commodity prices and wobbles in China, the nation’s biggest trading partner.
“After the early ’90s recession, when Treasury realized that they’d screwed up the policy response, they war gamed what they would do in similar circumstances and applied some of that knowledge during the global financial crisis,” said Saul Eslake, former chief Australia economist at Bank of America Merrill Lynch. “I would be gobsmacked if they hadn’t internally reviewed some of the lessons learned from the GFC experience.”
Eslake, who two years ago estimated a 25 percent risk of recession in Australia in 2015 or 2016, as a mining investment boom unwinds, still stands by that assessment.
Australia avoided falling into recession during the global financial crisis.
In response to the freezing of credit markets in 2008, Australia provided direct cash payments to consumers, a program then Treasury Secretary Ken Henry described as “go hard, go early and go to households.” The country avoided the 2009 global recession, though the government faced criticism for wasting money on some of its other stimulus programs.
Central bank Governor Glenn Stevens in July flagged a debate on whether Australia’s potential growth rate -- previously about 3.25 percent -- is now lower. That mirrors a similar discussion in the U.S.
Treasury, meanwhile, projected in May that economic growth would surge to 3.5 percent in the 12 months through June 2018, a level achieved only once in the past seven years.
A Bloomberg survey last month showed the median estimate for the risk of recession in the next 12 months was almost one-in-five, with the highest estimate at 30 percent. Australia’s gross domestic product grew 2.3 percent in the first quarter from a year earlier.
Keeping a lid on economic expansion is slowing population growth, which in 2015 is likely to be the weakest in nine years as potential immigrants look elsewhere. At the same time, the country’s productivity growth has slowed over the last decade as rising incomes from commodity exports meant innovation took a back seat.
When asked for research on recession scenarios or recession war-gaming in Australia over the past 12 months, Treasury said it couldn’t find any documents after a search of hard-copy and electronic files. The RBA said there were no documents relevant to the request.
Eslake, who was criticized in 2013 by then Prime Minister Julia Gillard over his recession probability estimate, noted that it was a government’s job to play down risks.
“It is possible to talk yourself into recessions,” he said. “So while it’s reasonable to expect governments to think about what they’d be doing in those circumstances, it’s not reasonable to expect them to be trumpeting it in advance because confidence does play an important role in these cycles and government’s job, publicly at least, is to boost confidence, not to detract from it.”
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