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Canberra urged to unleash stimulus as Australian economy stalls

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Via Financial Times

Christmas lights are being switching on across Australia but there is little seasonal cheer for retailers, who are suffering their weakest sales in three decades.

Retail sales volumes slipped 0.2 per cent in the year to end September, government figures show, and the industry has urged the government to cut taxes to stimulate the country’s economy.

“We are seeing declines in footfall through stores and a general lack of confidence from consumers and businesses . . . We’d really like to see the government move on tax,” said Russell Zimmerman, executive director of the Australian Retailers Association.

The gloom on the high street is mirrored across an economy that has failed to take off despite three interest rate cuts — now at a record low of 0.75 per cent — by the Reserve Bank of Australia (RBA) since June and a boom in mineral exports that is driving a record trade surplus.

Australia’s gross domestic product grew at 1.4 per cent in the year to end June, the slowest rate since the financial crisis in 2009. The jobless rate was 5.3 per cent in October, figures released on Thursday show, compared with 4.9 per cent in February. 

The Liberal-National government is now under increasing pressure to abandon its election pledge to return the budget to surplus for the first time in more than a decade and instead to unleash fiscal stimulus via tax cuts and infrastructure spending. 

The debate over the need for fiscal stimulus in Australia mirrors that elsewhere, with the IMF warning that Europe’s monetary policy options are all but exhausted and a “synchronised fiscal response” may be necessary to combat economic risks. 

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“Rate cuts are beginning to be interpreted by [Australian] businesses and consumers as a sign of weakness, as opposed to a sign of stimulus,” Brian Hartzer, chief executive of Westpac bank, told the Financial Times. 

The cuts are also contributing to a drop in bank earnings as the spreads between official rates and those charged to customers narrow, further denting confidence in a nation where a quarter of the population holds banks shares directly or in their pensions.

Last week the final batch of 2019 full-year results showed Australia’s four main banks — Commonwealth Bank of Australia (CBA), Westpac, ANZ Bank and National Australia Bank — suffered a combined 8 per cent slide in cash profits. 

Companies no longer had enough confidence to invest in their businesses, said Mr Hartzer, with a knock-on impact on employment, wage growth and consumer spending. 

In its quarterly monetary policy review earlier this month, the RBA downgraded a series of economic forecasts, including growth, wages, consumption and inflation, and warned “further easing could unintentionally convey an overly negative view of the economic outlook”.

It said it was prepared to cut rates again, if required, to stimulate growth but flagged the possible use of unconventional monetary policies. Philip Lowe, RBA governor, is due to deliver a speech later this month outlining options, which are likely to include negative interest rates and large-scale buying of government bonds

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The glut of weak economic data has prompted economists at Westpac and CBA to urge Canberra to bring forward personal income tax cuts scheduled for 2022 to 2025. Business lobby groups, trade unions and opposition parties have echoed the calls for decisive action to ensure Australia maintains its record 28-year run without a recession. 

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“It is time the Liberals brought forward a budget update to fix their forecasts and properly outline an economic plan that supports the floundering economy and better safeguards it from global risks,” said Jim Chalmers, shadow treasurer in the opposition Labor party. 

Canberra has so far refused, saying modest tax cuts implemented in July and promises of tax breaks for infrastructure investments are enough to keep the economy afloat. For now, balancing the budget remains its priority, it said. In May Canberra forecast a deficit of A$4.1bn ($2.8bn), or 0.2 per cent of GDP, in 2018-19, and a return to a 0.4 per cent surplus in 2019-20.

“If we were to respond to every call from every corner for increased spending we would not be in a position to pay down the debt we inherited, to have the flexibility to respond to future shocks and to provide the stability and certainty that households and businesses need to continue to consume and invest,” said Josh Frydenberg, Australia’s treasurer. 

But the blizzard of “sales” signs in shop windows is a visible symbol of weakness in an economy where just under 60 per cent of GDP is dependent on household consumption. Critics warn that declaring a 2019-20 budget surplus is unlikely to provide the confidence needed to jolt the economy to life.

“It can take up to two years for the full impact of interest rate cuts to be seen across an economy, so it is premature to say they haven’t worked,” said Sarah Hunter, economist at BIS Oxford Economics. 

“If there was a report card handed to the economy, it would get a ‘could do better’ grade, and the government could certainly help to up the grade through expansionary policy.” 

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