That view was echoed by RBC Capital Markets' Su-Lin Ong, who concluded: "Overly restrictive fiscal settings in Australia appear more (poor) politics than (good) economics."

RBC’s Su-Lin Ong believes fiscal measures would be good policy. AFR

The Reserve Bank will meet this week and futures markets are pricing in a 76 per cent chance of a 25 basis point cut to the cash rate on October 1. A reduction is fully priced in by November.

Lower interest rates face another challenge in an Australian consumer who is reluctant to spend, weighed down by high levels of debt after borrowing to participate in the last house price boom. Weak wage growth, which the Reserve Bank hopes to see accelerate, is not helping.

Reserve Bank data released on Friday showed Australians had nearly twice as much debt as income; the ratio rose to 191.1 per cent in the June quarter, up from 189.4 in March. The level of housing debt-to-income also increased, to 140.4 per cent, up from 139.8.

Banks were forced to partially turn off the credit tap in 2014, when prudential regulator APRA introduced a 10 per cent limit on annual growth in loans to property investors. That was followed by a 30 per cent limit on interest-only loans as a proportion of new lending in 2017.

Since the middle of this year, APRA has removed the serviceability buffer that required banks to assess all borrowers against their capacity to repay loans at 7 per cent, the Reserve Bank cut interest rates by a quarter-point in each of June and July, and the government has delivered tax cuts for low to middle income earners.


Commonwealth Bank's chief economist Michael Blythe sees some economic risks ahead. Lisa Maree Williams

Economists from the big four banks are wary on the prospects for economic growth, with several challenging indications from the 2018-19 company reporting season that the consumer is starting to spend again.

National Australia Bank’s chief economist, Alan Oster, is looking for rates to fall to 0.5 per cent by the end of 2019, and does not observe any signs of life in the private sector. "We don’t see any green shoots in the private sector," he said.

Westpac’s chief economist Bill Evans is also doubtful about growth, saying: “generally we are sceptical about the ‘green shoots’ hypothesis.”

“Global uncertainties, weak wages growth and a contracting residential construction cycle will continue to dominate the outlook,” Mr Evans said. He’s expecting one more rate cut this year.

Commonwealth Bank’s chief economist Michael Blythe is observing signs of stronger spending and an improved housing market, but he is not confident they can be sustained. “The main domestic risks relate to a downturn in residential construction and still-weak consumer spending,” he said.

And ANZ’s chief economist David Plank is concerned that any recovery in growth won't be material enough. “We are worried that the pick-up [in GDP growth] may be less than earlier expected.”

Australia’s second-quarter GDP print was abysmal, with growth falling to an annual pace of 1.4 per cent – the slowest since the global financial crisis.


The median forecast for GDP growth was 2 per cent for 2019, according to respondents. Growth is expected to increase to 2.3 per cent by the end of fiscal 2020, and 2.4 per cent by the end of the 2020 calendar year.

The Reserve Bank in contrast is forecasting GDP growth of 2.4 per cent this calendar year and 2.7 per cent for fiscal 2020, rising to 2.8 per cent by the end of calendar 2020.

Economists expect underlying inflation at 1.5 per cent by the end of the year, rising to 1.8 per cent by June, still well below the central bank's target band of 2 to 3 per cent, according to the survey.

The Reserve Bank sees the unemployment rate at 5.2 per cent by the end of the year, a decline from the current 5.3 per cent. A level of 5.2 per cent is also forecast for June 2020. Economists, on the other hand, are expecting the jobless rate to remain at 5.3 per cent during 2019 and to stay there to the end of June 2020.

Matthew Peter, chief economist at QIC said that the burden has fallen on monetary stimulus to provide breathing space to repair the budget. But with the cash rate approaching the lower bound, "fiscal policy should now start to play a role in boosting demand."

Politicians are now starting to question the effectiveness of cutting the cash rate to support growth. Treasurer Josh Frydenberg on Friday backed comments from former treasurer Peter Costello, who said "another 25 basis points frankly isn't going to do much to stimulate the economy."

But the central bank continues to do the heavy lifting, in part as it welcomes a lower currency. "Lower rates put downward pressure on the Australian dollar, or at a minimum offset 'unhelpful' upward pressure amid global easing," Carlos Cacho at UBS said.


Despite their enthusiasm for cutting the cash rate, economists warn there are risks in doing so, particularly for the housing market.

"We think there is a case for more fiscal support considering the limits and potential risks from further easing of monetary policy and the potential adoption of unconventional measures," notably a renewed rise in household indebtedness from a surge in house prices, said Tony Morris, from Bank of America Merrill Lynch.

Another 50 basis points of rate cuts to 0.5 per cent takes the cash rate much closer to zero. Some economies have already moved rates below zero, while the European Central Bank has stepped up the pace of bond buying.

It has proved hard to exit quantitative easing judging by the US, Japanese and European experience. "No central bank in the world has successfully exited quantitative easing. Even the Fed and ECB have never really shrunk their balance sheets by much. And the BoJ has had extreme difficulty in achieving a permanent exit," noted Damien Boey at Credit Suisse.

Tim Toohey says monetary and fiscal policy work well together. Photo: Luis Enrique Ascui

Fiscal measures can be deployed without hurting the budget position, economists say.

Elevated iron ore prices provide scope for the government to maintain its projected surpluses whilst bringing forward the second stage of its income tax relief package, suggested Goldman Sachs' Andrew Boak.


"Given the improved budget position, there is a sound argument to bring forward the tax relief scheduled to kick in from 1 July 2022," agreed Justin Fabo at Macquarie.

The federal treasurer has also called on businesses to invest, rather than focusing on capital management measures such as special dividend payouts and share buybacks.

But the timing of any fiscal response may still be some way off. Warren Hogan, adjunct professor at UTS Business School, said that its prudent to wait to see the effects of the income tax offsets.

"We also need to wait a little longer to see what the impact of rate cuts and an easing of macro prudential standards will have on the housing market and consumers. The early signs are mixed on all fronts."