What can we expect from the Australian economy?

 

What can we expect from the Australian economy?

David Chu, Head of International Business, discusses the statements issued by the Chairman of RBA and the Minister of Finance on Australia's financial policies and what they indicate about the financial community moving forward.

2020-05-21

David Chu, Head of International Business, recently joined Thomas Sung (host) on the SBS Radio Cantonese Program to discuss the current state of the Australian economy and what it's future may look like. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.

English transcript:

Host: On Tuesday, both the Chairman of RBA and the Minister for Finance separately issued statements to the public on Australia's financial policies. What exactly was said in the statements? How do they  feel about Australia's economy? What is the reaction of the financial community? To answer these questions, we once again welcome Mr. David Chu, Head of International Business of ShineWing Australia, to share his analysis.

David: The RBA will keep the interest rate unchanged at 0.25%. In fact, this is within everyone's expectations. Economic experts said that the change in interest has been determined, but the most important thing is to hear what the RBA Chairman says in his speech.

Host: So what exactly is disclosed?

David: Yes, the RBA Chairman was ‘cautiously optimistic’ in his statement. Economic experts also found that the Chairman was calmer this time than on the last two occasions. It seems that he also feels that the impact of the pandemic on the Australian economy has been alleviated, so their conclusion is that the Chairman believes the impact of the pandemic on Australia has almost reached its peak.

Host: This is a good thing. If the Reserve Bank does not add  more measures, it would mean that the current monetary policy is functioning.

David: You can say that again. At the same time, however, economic experts say that the RBA has almost exhausted its ammunitions, and the interest rate has fallen to such a low level of 0.25%, which is already right down the bottom. Australia and Europe are in different environments and it is impossible for the interest rate to go to negative figures in Australia. Therefore, the interest rate, as a tool, at 0.25% has already reached its limit. The Chairman also mentioned that they have another set of measures, which is quantitative easing.

Host: That is buying bonds.

David: The question is what kind of bonds to buy? Bonds also have credit ratings.

Host: Yes, yes.

David: In the past, if the RBA wanted to buy bonds, they could only buy A1 rating bonds for short-term ones, and now they can buy A3 rating bonds, which is a category of lower quality and higher risk. In the case of long-term bonds, the RBA would only buy the AAA rating bonds in the past, but now they have lowered it to BBB rating bonds. That  means, if further quantitative easing measures are used, the RBA will be willing to buy some lower-quality bonds to increase liquidity. This is not a bad thing, but after all it is hoped that liquidity can be maintained without buying that much.

Host: Many people say that in buying these bonds, the RBA is in fact helping some companies. Since in a very volatile situation, many people will sell their bonds, regardless of their grades, for cashing out. If your bond itself is rated low, plus in a very volatile situation, no one is willing to take over, and then there could be a crash, and once the crash happens the company may collapse. Is the RBA now trying to help these companies?

David: In fact, the RBA's action this time is mainly to help some financial institutions, because these financial institutions and investors are the main buyers of the bonds issued by companies. If the financial institutions have got these bonds which have a lower liquidity, they cannot dispose them without a big loss. If the RBA buys them that will allow these financial institutions to get some liquidity back for further lending. That’s why it is mainly to help some financial institutions. As to what kinds of bonds they are (like you just asked), we would recall that the 2008 Financial Crisis was caused largely by some junk bonds collapse. Whoever was holding those bonds was in trouble. That led to a lot of financial losses in the market in that situation.

Host: Due to time constraints, let's change the topic. The Treasurer attended a national press conference on Tuesday. The picture he portrayed for the Australian economy was pretty bad, right?

David: The Treasurer estimates that the unemployment rate will reach 10%. The figure released by the Australian Bureau of Statistics last time was only 5.2%, mainly because that 5.2% was based on statistics in early March. Now it will reach 10%. He said that if we did not have our own stimulus package in Australia and had instead followed Europe, our unemployment rate would have risen to 17%. Take this as giving credit to himself. However, others from the financial sector, such as ANZ Bank, believe that the unemployment rate may actually rise to 12-13%. As for the government’s stimulus packages, a total of $320 billion has been used, equivalent to 10% of GDP. Without these measures, if the economy would have continued to slump and Australia would have suffered $4 billion economic loss per week. Therefore, the Treasurer said that through these economic stimulus packages, Australia is managing to stabilise its economy, with the hope of a rebound after the pandemic. Let's see how the situation will evolve. Economic experts have already begun to say that the pandemic is close to an end, and it is time to think about how to make the economy start again.

Host: Did the Treasurer say that once the economy starts again, what preparations we should make now, such as some forward-looking policy deployment?

David: They said there might be some measures coming out. Many economic experts have proposed many different strategies. It is like, for example, when a car does not start due to a faulty battery and you want to make it start again. You need to jump start it by connecting a cable to another battery. What are the specific measures or methods in consideration? In general, economic experts say that there are three most important points.

First is that there must be some measures to help SMEs, because SMEs are almost the driving force of the Australian economy. If they cannot start again, there will be an impact on the entire economy, especially employment. In terms of SMEs, the most important thing is to target the hardest hit industries, i.e., tourism, leisure, retail, restaurants, etc., to help them start again and hire new employees.

Second is that, as some economic experts suggest, to allow international students or foreigners holding short-term working visas to return as soon as possible. That is because, due to the pandemic, 300,000 people on short-term visas have now left Australia. If you think about the total population of Australia that is only 25 million, 300,000 comprise a relatively significant group. Some experts say that we may need to allow these people to return as soon as possible. In the first place, they will create consumption in Australia; second, we need to generate export income provided by foreign students for Australia. It amounts to tens of billions of dollars.

The third is, as some economic experts suggest, to take this opportunity to change the tax system. Despite so many investigations on tax reform, no substantial changes have been made. They also mentioned that, for example, when buying a house, we need to pay stamp duty. This stamp duty actually goes into the state government’s treasury, but economic experts suggested that the every dollar of stamp duty may have an adverse effect equivalent to eighty cents on the gross national product.

Another thing is the Australian corporate income tax. The corporate income tax rate is now 25%. Economic experts also say that every dollar of corporate income tax going to treasury will have a fifty-cent impact on the economy. So do these types of taxes, which have a greater impact on the economy, require some sort of reform? In their view, it is certainly impossible to simply cut taxes. After all, the government needs money to spend. They may consider starting with changes in GST, because this tax is only paid when something is bought. In this way, the reduction in stamp duty and corporate income tax can be compensated by an increase in GST. This provides more encouragement for people to engage. By making more money and paying less income taxes, they increase their after-tax income. If the local government receives less money from one source, it will make up for it from other sources. So there are different approaches, depending on what measures the government will take to get Australia's economy back on track as soon as possible.

Host: Yes. David, you are a professional accountant. A lot of people are discussing one thing. Even when Australia is in a good economic condition, the reporting regulations, tax arrangements and accounting requirements are quite burdensome, making some companies spend a lot of money in compliance. What is your opinion on this?

David: Yes, the tax system in Australia is really complicated. The more the tax regulations, the higher the compliance reporting requirements. This has caused the public to spend a lot of energy and money on tax compliance. Therefore, business groups say they hope that the tax system can be simplified, so that the general public can save their energy for more constructive activities, such as doing more business or even spending time with their families. This is a good thing.

Host: Yes, yes. Big thanks to Mr. David Chu, Head of International Business of ShineWing Australia, for sharing with us his opinions on the Australian economy and the statements made by RBA and the Treasurer issued on Tuesday, as well as the forward-looking views of the financial community. Thank you!

David: Thank you Thomas! Thanks everybody.

 

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Get in touch

David is attuned to the Asian listed company market, international taxation issues, corporate regulations and various stock exchange requirements and is highly regarded in the market place. Reach out below to discuss how we can support your business during this challenging time.

David Chu

E dchu@shinewing.com.au


This podcast was originally published on SBS Cantonese Radio on 6 May 2020.
Disclaimer: The material contained in this page is in the nature of general comment and information only and is not advice. The material should not be relied upon. ShineWing Australia, and related entity, or any of its offices, employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in the publication.