18 Feb 2015
Australia may need to undertake fiscal stimulus – Nomura
FXStreet (Barcelona) - Richard Koo, Chief Economist at Nomura, explains that with Australian businesses’ appetite for investment falling and household sector increasing its savings, the country faces a risk of balance sheet recession, which points to the need of fiscal stimulus.
Key Quotes
“Australia now experiencing mildest possible balance sheet recession. …state of affairs, in which the household sector as a whole is increasing its savings despite ultra-low interest rates but there is still a substantial group of borrowers, represents the mildest possible form of balance sheet recession.”
“I suspect that Australian businesses’ willingness to invest has sharply diminished since then on the steep drop in the price of oil and other commodities that occurred in Q4 combined with the slowdown in China’s economy that is partly responsible for the decline in commodity prices.”
“If corporate demand for funds were to fall, the household sector’s surplus of funds would have nowhere to go at a time of historically low interest rates, signaling the start of a fullblown balance sheet recession.”
“…Australia risks falling into a deep recession unless the government shifts its policy focus from fiscal consolidation to fiscal stimulus.”
“There are two things we need to watch for: a decline in house prices, which could reduce the household sector’s demand for funds, and a decline in corporate demand for funds in response to falling export prices.”
“I see a fairly high probability for both events, and I suspect the RBA’s recent rate cut took that scenario into account.”
“That said, both short- and long-term Australian interest rates are at historically low levels, and I suspect that most of the people whom lower interest rates might persuade to borrow have already done so.”
“Hence I do not think the recent rate cut will lead to a sharp increase in the number of borrowers.”
“In that case, the weakness in the economy may continue until the government fulfills its role as borrower of last resort and engages in fiscal stimulus.”
Key Quotes
“Australia now experiencing mildest possible balance sheet recession. …state of affairs, in which the household sector as a whole is increasing its savings despite ultra-low interest rates but there is still a substantial group of borrowers, represents the mildest possible form of balance sheet recession.”
“I suspect that Australian businesses’ willingness to invest has sharply diminished since then on the steep drop in the price of oil and other commodities that occurred in Q4 combined with the slowdown in China’s economy that is partly responsible for the decline in commodity prices.”
“If corporate demand for funds were to fall, the household sector’s surplus of funds would have nowhere to go at a time of historically low interest rates, signaling the start of a fullblown balance sheet recession.”
“…Australia risks falling into a deep recession unless the government shifts its policy focus from fiscal consolidation to fiscal stimulus.”
“There are two things we need to watch for: a decline in house prices, which could reduce the household sector’s demand for funds, and a decline in corporate demand for funds in response to falling export prices.”
“I see a fairly high probability for both events, and I suspect the RBA’s recent rate cut took that scenario into account.”
“That said, both short- and long-term Australian interest rates are at historically low levels, and I suspect that most of the people whom lower interest rates might persuade to borrow have already done so.”
“Hence I do not think the recent rate cut will lead to a sharp increase in the number of borrowers.”
“In that case, the weakness in the economy may continue until the government fulfills its role as borrower of last resort and engages in fiscal stimulus.”