Transcript of Question & Answer Session Panel participation at the ANU Crawford Leadership Forum on ‘Global Economy and COVID-19'

Welcome everybody. I'm Renee Fry-McKibbin, Professor of Economics in the Crawford School of Public Policy at the ANU and I'm Co-Director of the COVID-19 and the Macroeconomy Research Program at the Centre for Applied Macroeconomic Analysis in the Crawford School. We're excited to have you join us for our panel discussion today on the global economy and COVID-19. But let me also begin by acknowledging and celebrating the First Australians on whose many traditional lands we meet through Zoom today and pay my respects to the Elders, past, present and emerging.

In this session, we have a distinguished panel of economists from US, Asia and Australia, who are dealing with the economic issues that are arising from the evolution of COVID-19. Let me first begin by introducing our panellists. We have Catherine Mann, Yiping Huang and Philip Lowe. Catherine Mann is Managing Director and Global Chief Economist at Citi, where she is responsible for thought leadership research guidance of a global team of economists, and cross-fertilisation of research across macroeconomics, fixed income and equities. She was Chief Economist at the OECD, Finance Deputy to the G20, the Barbara ‘54 and Richard M Rosenberg Professor of Global Finance at Brandeis University and Director of the Rosenberg Institute of Global Finance. She has also held positions at the Peter G Peterson Institute for International Economics, the federal Reserve Board of Governors, the President's Council of Economic Advisers and Adviser to the Chief Economist at the World Bank. Dr Mann received her PhD in Economics from the MIT and her undergraduate degree from Harvard University.

Our second panellist is Yiping Huang, who is Director of the Institute of Digital Finance and Jin Guang Chair, Professor of Economics and Deputy Dean of the National School of Development at Peking University. He is a member of the Monetary Policy Committee at the People's Bank of China and Research Fellow at the Finance Research Center of the Counselors' Office of the State Council. He serves as Chairman of the Academic Committee of China Finance 40 Forum a member of Chinese Economists 50 Forum, and the Rio Tinto Adjunct Professor in the Chinese Economy at the ANU. He has also held positions at the State Council, the ANU, Columbia Business School, and Citigroup. Yiping received his PhD in Economics from the ANU.

Our third panellist is Philip Lowe, who was Governor of the Reserve Bank of Australia. Mr Lowe holds a PhD from MIT and a Bachelor of Commerce with Honours in Economics and Econometrics from the University of New South Wales. He has authored numerous papers, including on the linkages between monetary policy and financial stability. He is Chair of the Reserve Bank Board and Payments System Board and Chair of the Council of Financial Regulators and a member of the Financial Stability Board. He also held positions as Deputy Governor and Assistant Governor of the Reserve Bank. Mr Lowe is Chair of the Financial Markets Foundation for Children and a Director of The Anika Foundation. He is also a signatory to the Banking and Finance Oath.

The full biographies of our speakers are available in the conference program. While you're getting your questions together and remember to put them on the Q&A bar at the bottom of your screen, I will now ask some questions of our panellists, but we'd love to hear from you.

I'm going to start with Catherine. So just let me begin, Catherine, so you're based in the US. Can you tell us what your experience of COVID has been for the last several months?

Well, Renee, yes, I'm based in New York. That's where the city's main offices are 388 Greenwich Street in New York, but Citi is no longer there really. There's nobody in the office there at all and when Citi went quite actually precipitously to a work from home protocol in middle of March, I actually moved to my permanent residence up in New Hampshire. So from my standpoint, you know, I have a global team, I'm used to working with that global team on remote capabilities. We haven't used Zoom so much in the past, but of course, we use it now. So for me, moving from a New York office to a New Hampshire office was actually fairly seamless in terms of the work that I do and the team that I work with. Now, of course, clients are different in a sense that now I'm meeting with clients on a remote basis instead of face-to-face travelling around the world.

But in some sense, it's a vision of where we're going to go because Citi is not intending to have people back into the office a hundred per cent, until sometime next year. So my apartment in New York, the lease went up and I didn't renew it. I'm now permanently in New Hampshire resident, at least until something else changes. So a little bit different than living in New York where some of my team members are there and it has been much, much more difficult for them than it has been for me, I'm very fortunate.

It will be interesting to see how consumers and businesses are going to change after this. But that's sort of touches a little bit on your research. Your research at Citi focuses on the interactions between financial market decision-making and real side consumer and business investment decision-making and you have a global perspective. Presumably, your research has taken on a new urgency, not just for Citi, but for the global economy as well. Can you share some of your insights from your experience on the reactions of consumers and businesses on a global basis to COVID-19? And does this vary with the intensity of an economy's exposure to sectors such as technology, tourism and commodities?

We've been evaluating countries within the global economy through the lens of different sectors and we've sort of euphemistically called these sectors work sectors and play sectors. Now the work sectors are more manufacturing-oriented ones, where you have a product that is a tangible product that has an inventory. And so those sectors in principle can run down their inventories while they're on lockdown and then rebuild their inventory. That kind of looks a little bit more like a V-shaped recovery. On the other hand, the so-called play sectors. These are the consumer discretionary sectors. Of course, the people who work in those sectors definitely are working. But we call them the play sectors because they're choice, these are choice. You can choose to go to a restaurant or entertainment or travel and what we have found, of course, is that these sectors the activities are not storable, they are services, they're hotel rooms, whatever, aeroplane flights.

And so for companies in those sectors, it is absolutely an L-shaped recovery. What was lost in the early part of this year will never be recovered from the standpoint of revenues for a company. It's also never recoverable for our country as well. Now, when we made, when we made this sort of alphabet of recovery, the V for manufacturing, and the L much more for consumer discretionary, what we have found actually, of course, is that the manufacturing is not nearly as much of a V-shape as it seems because supply chains are disrupted, not just because of some geopolitical reasons and nationalistic reasons in the healthcare and PPE space, but more generally if one factory is closed and your supply chain partner is open, you still have a problem. And so the manufacturing has also been very definitively affected and the recovery is taking much longer than many people thought.

The consumer discretionary sector faces two headwinds. One of course, is the fear of a resurgence. And very unfortunately, we are seeing some resurgence of those virus cases and so there's a consumer fear. Businesses' response to consumer fear with regard to slowing down a production line, having fewer people in a restaurant, masks on an aeroplane, all of these things are businesses responding to consumer concerns. Of course, in that environment, business investment is not as strong and business employment is not as strong. We are very concerned about this pace of return of the consumer, especially in the consumer discretionary space. You put that all together and you look at a very long delay in achieving a pre-COVID level of GDP. We do not see that happening until later on in 2021.

Some countries may be sooner but there's a very long tail in the global economy of countries that are not expected to achieve the pre-COVID level of GDP, even into the end of 2021 and into 2022. This is not a picture of recovery that that is satisfactory in any way, shape or form. Of course, this is even given the really substantial and we would argue appropriate fiscal response and monetary policy response. There's more that needs to be done. We have some more time when we ought to be thinking about fiscal choices, because as Professor Bishop said, there's a lot of debt. So we have to be thinking about fiscal choices and monetary policy choices that will bolster the supply side of the economy, the productivity growth in the economy, because that is going to be essential going forward as a way to repay these obligations that economies are taking on.

Some are in more difficult cases than others, the tourism dependent economies are the ones we worry about the most, the manufacturing economies are rebounding a little bit more quickly, especially if they are technology oriented. But even those economies ultimately are going to be hostage to a less robust global economy. So we really need to be thinking about those fiscal and monetary policy actions going forward to set the stage for a more robust recovery and one that has strong productivity growth, essential ingredient.

Thank you. So I'll now turn to Yiping. Yiping is coming to us from Hong Kong. Can you just give us a sense of what your experience of COVID-19 has been?

Of course, I'm at the moment in Hong Kong, but I normally based in Beijing. I came back on the Chinese New Year's Day to celebrate the Chinese New Year, but I've been stuck here ever since. My life in Hong Kong is actually not difficult because I live on an Island, so I go out hiking every day, which I never would be able to do in my normal life. But Beijing, it was quite difficult for quite a while. I came back late January. My original expectation when this whole thing started was that I probably should be able to go back within one to two months and now it will be very soon five months and I'm still not sure if I would be able to go back. There's discussion if we might be able to re-start the new semester in September on time.

So it's quite a difficult. For quite a while, it looks like things are becoming controlled from March. But now it looks like there's new cases and economic activities have become a lot more uncertain. So I think the one thing I'd just like say compared to my previous experience at that time in 2003, when I was in Hong Kong, we had SARS. And that was the very brief, it was a sharp decline, but it was very brief and once economic activities recovered, we had like a V-shaped the recovery. I don't think that this time will repeat the same drama.

Yeah. We have a lot of students who went back to China for Chinese New Year, and haven't been able to come back to Australia as well. So we know what you're going through. So unless a vaccine for COVID-19 is found soon, the structure of the global economy is likely to change permanently, particularly considering our use of technology, international trade and supply chains. China is a huge part of that transformation. So what trends do you see emerging in the Chinese economy that you think will be permanent?

Well, I think that the change has already started. The rising importance of the digital economy. In fact, I just imagined the SARS in 2003. The Alibaba's Taobao, was actually launched the months after the end of the SARS in 2003. Now today, in fact, the e-commerce already accounted for 30 per cent of the total retail sales. So that's already becoming a big part of the story. But it actually was quite useful during this pandemic, and as Catherine mentioned earlier, businesses are responding to the changing environment. I saw the digital economy, online activities and so on, in fact, became an important macroeconomic stabiliser. I mentioned I've been in Hong Kong for the whole five months, but I actually taught a course during the last semester, and they just submitted the final results last week. So activities continue.

In fact, in some areas it became even more dynamic. So my expectation is that China will probably continue in that direction. Number one, because we're talking about this so-called the fourth industrial revolution, which will probably push the application of the big data, AI, and so on even in a more significant way. The second is because after the pandemic people now actually appreciate more these contactless transactions. Number three is, well, the government now is thinking about the need that your further stimulate the economy and they are thinking to invest more in the so-called new infrastructure. New infrastructure is more related to the IT sector, the big data and the cloud computing and so on. So with all these factors I do expect that the Chinese will move in that direction with a much, much more prominent role of the digital economy in the whole economy.

Do you think these trends will be a catalyst of significant growth for China, and do you think that these emerging trends might spill over to other countries?

I think that this is a very big thing for China in the next phase, you are seeing basically almost everywhere things are trying to be digitalised whether it's in terms of manufacturing activities or services sector, but also finance. So with the government, and the private sector joining forces, making a lot more investment and probably encouraged by what is happening at the moment. So I do think that this will become a new theme of the Chinese economy. How much that will stimulate the global economy, with the spill overs, I think it really depends on what happens in the aftermath of the pandemic. For instance, the global trade resumes, the investment arrangement and so on. But definitely if China is going to invest more in the amount for more technology, there will be a lot more demand and interactions with the rest of the world. I'm sure there will be more demand for Australia commodities.

That's good to hear. Okay. So I'll now turn to Phil Lowe. The last few months must've been a tough period of time for policymakers like yourself. So thank you for leading us through these tough times. The tandem health and economic crises have been accompanied by massive uncertainty. But we started in a good position relative to other countries in terms of having more fiscal capacity than most countries, a history of sustained growth and a population at least up until now, have followed the distancing restrictions. But if we compare ourselves to where we were before the Global Financial Crisis, we were in a similar, strong position, obviously it's a different type of crisis. But we know that international policy coordination was important during the crisis. I'd be interested to know how, and to what extent the RBA is working with central banks from other economies. And how do you compare the situation working with other central banks now to the last crisis?

Good morning and thank you, Renee. You're right, Australia was in a much better position going into this crisis than many other countries. It reflects a long history of responsible fiscal policy, very sound institutional arrangements, and a strong banking system. In terms of the cooperation between the central banks, it's a been deep and wide ranging. The main form of cooperation though, is information sharing and comparing notes. The central bank governors have been meeting regularly through video conferences, most of them organised by the BIS. Our staff are talking all the time and I'm Chair of the Committee of the Global Financial System and we've been having regular catchups.

In March and April we were talking about the extreme volatility in our markets and worryingly, the dislocation in government bond markets, which were affecting the risk free yield curve everywhere around the world. And then our discussions turned to the really terrible consequences for the labour market, for people, of the virus and economic downturn and how we should respond in terms of policy.

So those discussions have been really helpful for me in framing our own policy response. The one area where there's been explicit policy coordination is the provision of the US dollar swap line. The same thing occurred in the Global Financial Crisis. In some parts of the world, there was a shortage of US dollars. So the Federal Reserve set up a facility to supply US dollars into different parts of the world. So we've been having these regular auctions of US dollars in Australia. As many other countries have had, the US dollars are ultimately supplied by the Federal Reserve. In Australia there's been very little take up of these US dollars because the Australian banks have little demand for US dollars at the moment. So the main form of coordination really is information sharing, we're all responding to the common shock, and it's good to be able to compare notes.

Great, thank you. I might now turn back to Catherine. In April the US unemployment rate reached 14.7 per cent and 6.65 million people filed for unemployment. In comparison, only 665,000 people filed for unemployment in the Great Recession. The Atlanta Fed's measure of GDP now suggests output growth of minus 48.5 per cent on an annualised basis. And on Monday of last week, the Federal Reserve announced that it would purchase debt issued by corporations to support market liquidity and credit given the high stress in financial markets. However, the stock market has recovered by 45 per cent since it's low in March. Given the devastating numbers in the real economy and these extreme policy measures, how can a disconnect between financial markets and the macroeconomy be explained? And will the devastation that we're seeing in the macroeconomy eventually show up in financial markets?

You're absolutely right, Renee. There is really quite a striking disconnect between the measures in the financial markets and the measures of the real economy. I know that even amongst my financial market colleagues, they too are very concerned about this disconnect. They are very worried that there's going to be a comeuppance for financial markets and not just the equity markets. We see it in the spreads, in the investment grade space. We also see it in the high yield space. There's been quite a bit of narrowing on their expectations that either the economy is going to perform much better than most of us expect or that there is a permanent backstop from the Federal Reserve. I think it's important though, to step back just a little bit to the time when this very significant market dislocation happened on March 23rd.

And at that time, the Federal Reserve was faced, and actually the fiscal authorities as well, with a tremendous upheaval in the financial markets. And it was 100 per cent appropriate at that time for the Federal Reserve to pull out a real range of policies and programs that they had originally put together in the context of the Global Financial Crisis. It was critical at that moment because we were already in the throes of the COVID crisis and the potential at that moment was for another Global Financial Crisis to evolve, on top of a disease crisis, a virus crisis. It was absolutely appropriate at that time to come forward with the programs that they'd put into place.

Now, you know, time has passed and those programs have been very successful. Perhaps just announcements alone had a major effect on the economy, but it was also backed up by the fiscal. If we go back to the timeline, it wasn't the Fed alone. It was also the fiscal authorities and the very robust programs that they put into place. But, you know, time has passed and as I noted before, we need to, even though the virus is not behind us yet, we do worry about the second waves, as policymakers, we have to be looking forward and we have to be looking not to exit. I mean, that's, that's way too early a word to be considering, but we have to be looking at what are we putting into place in order to create an environment going forward, where there is productivity enhancing growth to be supportive of the debt burdens that are being appropriately taken on.

Now you have to look forward to how are we going to repay it. That also has a policy element to it that is critically important. And I might argue that Europe with its focus on the pan-European recovery fund, the emphasis on the digital and climate that does create an environment where business investment has to step up because digital and climate require new investment, new ideas and innovation. We don't see that yet in the United States, there's some discussion of infrastructure projects, but that's kind of limited. So I think it's an important distinction between the US and Europe. When we think about from the fiscal side.

On the monetary policy side, you know, I think the issue here is that the financial markets are very comfortable with a backstock. They get very comfortable with the Fed having the tools to narrow the spreads, kind of indiscriminately. On the high yield market, in particular, all the spreads are narrow. Some of them should be wider than they currently are. And the equity markets too, are you could say, well, they're looking forward to next year when everything will be better again. But you can say, you know, no, actually it's not better next year. It's only as good as it was last year. And that's really not good enough for an awful lot of people and it shouldn't be good enough for the equity markets to be performing the way they have.

Yiping, I'll now turn to you. The behaviour of business and consumers has changed in terms of how payments are made and received as a result of COVID-19. Some merchants prefer contactless forms of payments and are refusing to accept cash for health reasons. And meanwhile, consumers have moved to online shopping where there is no facility to choose cash to purchase goods. So as Director of the Institute of Digital Finance, do you think that the accelerated move towards a digital economy will be a permanent change?

Well certainly, I think, I mean, China actually is leading in terms of mobile payment. And we have the two largest mobile payment service providers like WeChat and Alipay, each of them, actually have something like around 1 billion active users on each of their systems. It's been quite extensively used, and nowadays, people like me going out normally wouldn't really carry any cash in my wallet, so a mobile phone would really be sufficient, and that's actually quite extensively used. The biggest thing, and the most important contribution really is to extend the financial services to people that otherwise would never be covered by the traditional financial services. So for instance, people in the remote areas, in the Western region and so on. As I said, when more than 1 billion people are using the mobile phones, this is a really a big advancement going forward.

The second thing that these mobile payment service providers did was they were also trying to cover these businesses, so called offline businesses. There is one thing I'm not sure if your audience is familiar with this payment techniques, there's a so called ‘quick response code’. This is one special note that you can print on the paper and then you put it on your store and the people can come in just to pay, use their mobile payment. Rolling out these quicker payment code, the QR codes to the offline, the street side stores, you are including all these business into your system. We had a recent count and it's roughly close to 100 million stores, small business. What do we call them? Offline, small businesses. They're already a part of the mobile payment services.

So that is really playing a very big role. I'm not sure if this is going to become a new trend it's already here. It's already covered almost 100 per cent of these offline businesses. But the final big change, and I think we start to become a lot more appreciative, is that even during this pandemic period, you are able to extend a loan to these businesses, that still require some financial assistance. Because most of the bank branches have actually shut down because of the lockdown and the social distance policies and so on. But these online banks, these are the new banks. We have a three new internet banks that are called MYbank, WeBank, XW Bank, they continue to extend lots of loans, for a couple of reasons. Number one, because you do have a big tech platform which, as I said, each of them already has something like a 1 billion active customers.

So customer acquisition is no longer an issue. And in fact, because of the longtail feature, marginal cost of servicing additional customers is very, very low that's the first thing. You already have all these customers at the doorstep of your bank, the virtual bank. The second thing they did was use big data analysis and created the risk assessment. Because usually the banks will only be able to manage the risk by looking at your financial history or rate your assets. But now you can look at actually your digital footprint and the using the so-called machine learning models. We just completed a joint study with IMF Economist, which will be out as a working paper, just to show this fintech approach for credit risk assessment, actually works better than the traditional approach. Mostly because of the information advantage and because of the model advantage. The third thing is because once you have a big tech platform, you can actually monitor the whole process, from the loan application to lending.

And in fact, the Alibaba's MYbank, they have this so-called 310 Model, which basically means a potential customer can apply for a loan, filling in the form online, within three minutes. If the loan is approved, the money is in your account within one second. And the numbers read there's zero human intervention in the whole process. So that kind of the new technology really is changing the life and changing the financial industry in China. MYbank alone at the moment already services more than 20 million customers, extending loans every year. So that, I think is not just a new trend, it's a revolution, especially for financial inclusion.

Great. Thank you. So we might now turn back to Phil. Now that the Fed is purchasing corporate bonds to stimulate the US economy, how effective can monetary policy in Australia be going forward, given that US intervention in financial markets will have large effects on international capital flows and will likely appreciate the Australian dollar. Well, this new monetary regime in the US reduce your capacity to conduct monetary policy independently of foreign central banks?

I think the answer to that, Renee, is no it won't. I don't see any loss of monetary independence here. We still have the ability to choose the monetary policy measures that are needed for Australia. We've seen recently, we introduced a form of yield curve control, and we have a term funding facility for the bank system. And in the US, you've seen extraordinary interventions in capital markets because capital markets are very important for you in the United States. So we can still choose the measures that are suitable for our own needs.

In terms of the exchange rate, we do know that when a country eases monetary policy, the exchange rate tends to depreciate. So if everyone eases and we don't, we'd expect the dollar to appreciate. Now at some point, it's true, that could become a problem, but I don't think we've reached that point yet. I would like a lower currency in terms of macroeconomic outcomes. It would help reduce unemployment and lift inflation closer to target. But at the moment, I think it's really hard to argue that the Australian dollar is overvalued. We need to remember that exchange rates are relative prices and health outcomes in Australia have been relatively good. And the economic outcomes so far have been relatively good and I think the future is relatively good compared to many other countries as well, and commodity prices have held up.

So it's not surprising to me that the Australian dollar is where it is. I'd like a lower one, because I'd like lower unemployment and slightly higher inflation, but I'm not worried about a loss of monetary independency. I think we can still choose the measures that are needed for our own economy.

Do you think that now would be a good time to revisit the monetary policy framework for Australia given the substantial and seemingly permanent changes that we're seeing in the conduct of monetary policy internationally?

No, I don't think it's the right time now to change the management policy framework. The one we've had for 30 years has served us very well. But as things develop over the next coming few years, it might be worth at it again. At a very high level though, and I think this is important, the objectives of the RBA are set out in legislation was passed by the parliament way back in 1959. And those objectives are price stability, full employment, and the promotion of economic welfare of the people of Australia.

In my view, those objectives have stood the test of time. They're the right objectives for a central bank and at a very high level, they continue to guide our policy. Over the past 30 years, we've thought the best way to pursue those objectives was to have a flexible medium term inflation target and that's served us really well. In time it might be worth looking at whether there are other ways to achieve those very high level objectives that are set in legislation.

At least though, at the moment, my view is that it's not clear that there's a better framework than the one we have but it's worth continuing to look at ideas. Whatever framework we have though, I think it's likely we're going to see interest rates at their current level for years. So it could change the framework, but I don't think it's going to change the outlook for interest rates over the next few years, given the deflationary forces in the world economy; the large output gaps that exist. The savings investment dynamics right around the world, I think we're going to have low interest rates for a long period of time, whatever framework we have. Thank you.

Thank you. So we have a question from the audience. So Warwick McKibbin, would you please like to turn on your video and microphone?

Hi Catherine, hi Phil, hi Yiping, good to see you looking so well. Oh, I can actually turn on my video now. There we are. So as Catherine said, we're nowhere near the end of this pandemic and we are likely to see further waves until there's a vaccine. My concern though is a lot of policies around the world, particularly the fiscal positions of governments has been predicated on coming to an end very soon. It seems to me that by creating this enormous uncertainty with fiscal cliffs, in Australia's case, in September. Do you think that's such a good idea and that we should be actually doing whatever it takes to keep the world economy functioning?

And secondly, part of the problem I understand is the very large build-up of government debt. Is this a problem when we have negative real interest rates to the extent we have? And should we be more creative with the way we finance some of these interventions? For example, income contingent loans or revenue contingent loans for small businesses could be a way in which the fiscal position doesn't actually get impacted if in fact, those companies and those individuals whose incomes return to more normal levels, actually get to repay the loans. Thank you.

Who would like to address those questions?

Well, that last point, I think you know … Hi Warwick, it's been a long time since we've seen each other. Anyway, too bad that we're not in Australia at this very moment. So I think two points, one that I already made, which is that we really have to be looking forward to be more creative and more thinking about how do the policies that we put into place now support productivity, enhancing growth going forward. That I think is critical and as I say, some economies policy makers are addressing that to a greater degree than others. Now, the creativity part, I think we have seen some creativity in some countries with regard to the use of a guarantee instead of straight spending.

So in Europe, in particular, and not all the countries within Europe, have been able to do that, but there have been much more deployment of a guarantee function. And that is not exactly an income contingent loan, but it does serve a bit of a function because it basically means that the government stands behind the activities and the loans. And the guarantee is only called if the overall climate deteriorates to the point where the businesses cannot function, which of course in the context of Germany, would also impact the banks negatively. So that is an important sort of creative strategy which does not use the fiscal instrument as, you know, as a bunt tool, a tax and spend, but more as a guarantee, and there could be more room for that sort of thing, I feel, in my view.

It does have impacts on the financial markets. You can't get away from that. But, you know, it is assuming that your policies as a whole will move the economy onto a more robust growth path. And so your guarantees serve that purpose and they do not get called.

It's Philip here, can I come in? Warwick asked whether we should be doing whatever it takes. And the answer to that, for me, is yes. I've seen what we've been doing is building a bridge to when we get to the other side, once the virus has passed, because at some point it will pass and to build that bridge, we'd need to throw everything at it, both on the fiscal and monetary front. I think that's been an entirely appropriate thing to do. When we get to the other side, though, once we built the bridge and we get to the other side, and the recovery is taking place, I think we do face a world where there'll be a shadow from the virus for quite a few years. People be more risk averse; they won't want to borrow. In Australia we're going to have lower population dynamics.

So unless we change something, we're going to have a world of slower growth in Australia. And if that's the world we're in, we can't resolve that problem by just continuing to borrow. Borrow to build the bridge, but we can't borrow to address a slower growth world, but what we can do is reform. And the list of areas where we should be doing reforms are well known and they include tax, infrastructure, human capital, industrial relations, regulation, entrepreneurship, and R & D. If we don't address those areas, then I think we'll just meander along with mediocre growth and we can't borrow our way out of that. But we can borrow to make investments in these areas to lift our potential growth rate, back up to where it was before. It's the right thing to borrow now to build the bridge and it'll be the right thing to borrow, to make investments in our future. Thank you.

I might turn to Phil. A recent report from Deutsche Bank shows that low interest rates and leverage in the corporate sector have created an environment for zombie firms as unproductive firms can remain alive, preventing investment and employment in more productive firms. So this would ultimately lower growth in the economy. You are now conducting unconventional monetary policy and interest rates are incredibly low, how can Australia avoid developing a zombie economy being in an ultra-low interest rate environment?

I don't think we've got a zombie economy. I'm not really worried that there are a whole bunch of zombies around in the Australian economy that are consuming financial resources and workers and scarce physical assets, preventing the successful dynamic companies from growing. That's not the world we're in. There's a lot of spare capacity, firms with good ideas can attract financial capital, they can attract resources and they can attract workers. So I don't think it's right to blame the zombies. But I do think there is a more general issue here, which is actually more important and that is a lack of an economic dynamism in Australia. I've been concerned about this for some years, and I'm even more concerned about it now. Before the virus hit, we saw slow rates of business formation, we saw low rates of job switching, and we saw reduced research and development expenditure in Australia.

They're all signs that we're not as dynamic as we used to be. I don't think you can blame zombie firms for that, it comes to things that are deeper. The society's attitudes to risk taking the nature and extent of regulation. Our tendency to regulate whenever we see a problem. Incentives, we set up in the tax system for entrepreneurship and the arrangements for research and development and for failing firms exiting the market. So they're the things that are making us less dynamic. So I'm not blaming the zombie firms that are surviving at the moment. Remember those zombie firms, if they exist, are employing people, which is good, and there's plenty of capacity for strong firms to grow. It's these deeper things that worry me. And they go to the society's attitudes to risk and entrepreneurship. That's the thing we should be focusing on.

I have a question from Paul Lindwall, which is what are the implications if there is a permanent systemic increase in risk aversion, as a result of COVID-19. Would these reduce innovation, lower productivity, et cetera. And is there likely to be anything that can usefully address this? I'm not sure who that is directed to you, but who would like to try to answer that one?

I think Governor Lowe, this basically gave the answer to that one.

I think there will be a protracted period where people are more risk averse, and that means they're going to be less likely to spend and firms are going to be less likely to invest. So do we just accept that? I hope the answer is no. I think governments and business can reenergise the entrepreneurial spirit and make investments that leverage off the fantastic technology that's around in the world. We're all finding new ways of using this technology. I think that's going to have a long benefit over time. But a comprehensive reform agenda by governments backed by business, I think will make a difference and reenergise the sense of optimism that people have about the future. If we don't do that, I think we're just going to meander along, being slightly risk averse, low growth, low growth in wages, asset prices not moving very far, and just a general sense of malaise, but that's not inevitable.

We have one other live question by Daniel Moss. Daniel, could you please turn on your camera and mic?

Hi, good morning. Phil, notwithstanding your comments about the framework. I'd like to ask that from a broader perspective. When central bankers have talked since the onset of COVID, the first thing they address and the thing they address most articulately is the prospect of long-term scarring in the labour market and the very high rates of unemployment. Now, most central banks have some sort of text in their mandates about full employment. Yet rarely if at all, is this a numeric employment or unemployment target similar to the 2 per cent that figures in a lot of inflation targets. Is it time or is one consequence of this era, we move to a numeric, easily identifiable labour market type target of some kind?

I don't think it makes to have a target for the unemployment rate in the same way we've had a target for the inflation rate. We're seeing at the moment how the unemployment right can be a misleading indicator of what's going on in the labour market with this big decline in employment. Many people have left the labour force. The unemployment rate has not risen that much. The labour market is much richer and we need many more sources of information than just the unemployment rate. Over recent years, we focused a lot on underemployment as well. So people who have part time jobs who want more hours, that's a form of underemployment.

We just don't know what constitutes full employment in terms of unemployment rates. So I think I would be loath to commit to a specific number. The general point though, and the legislators back in 1959 knew this, is we should be seeking to get to full employment. However we define that in terms of unemployment or underemployment, hours worked. That's the right objective to have to be at full employment. I don't think we get much from putting a specific number for the unemployment rate on that.

To answer it, you know, from the experience of the United States, the United States has had an extended period of time where the unemployment rate kept falling well below what anybody would have thought was the non-inflationary non-accelerating inflation rate of unemployment or so-called NAIRU. And if there had been an explicit target of unemployment at NAIRU, which people thought of was maybe 5 per cent, maybe 4.5 per cent or so, then the last period of time where more and more people were brought into the labour market, including people who had left the labour force, those people would not have become employed. The Federal Reserve would not have tightened sooner and would have gotten further and further away from the inflation objective.

So I think the challenge is when there's multiple objectives and, you know, not all central banks do have more have dual mandates. I mean, I think the challenge here is that you don't want to move further away from one objective because you've met one of the targets. When in fact, as Governor Lowe says, there are extended uncertainties about getting to the NAIRU. It's not a magic number. And you would hate to be in an environment where you tightened monetary policy too soon and left people out of participating in a labour market. And that's what you would worry about the most in the context of unemployment.

So we only have a few minutes left, so I just want to finish up by asking you all the same question about your own economies and that is, do you have a positive vision of what your economy will look like as we emerge from the COVID-19 pandemic, and what is your vision? So maybe we'll start with Catherine?

Well, my positive vision is one that we do have more entrepreneurship. We do have more risk-taking we do have more innovation. We have more productivity growth. It's a vision of the United States that is comfortable again, engaging in the global economy with its allies to make differences in the way globalisation takes place. Both on the global scale, but has a domestic policy framework that recognises that not everybody has been able to enjoy the fruits of either the globalisation that we did have, or the financial benefits that some people have. So there's a lot of inequality in the United States. We've seen it play out particularly in the last few weeks with Black Lives Matter. And before that, over the decade with the manufacturing erosion and so forth.

So that is a domestic policy problem, but you cannot affect the domestic policy in an environment of retreat from globalisation and retreat from technological innovation. So you need those two pillars, technological innovation and deeper global engagement in order to make good on the commitments that you've made to your citizens, all of your citizens. That's my vision.

Yiping?

Well there are two things that I feel quite optimistic about the Chinese economy coming out of the pandemic. The first thing is the digital economy I already mentioned. It's already like widespread application in the Chinese economy. Now with increased investment of the government and the private sector making more investment and pushing ahead in this area, I think that one bright spot for the Chinese economy. The second area, I think I'm paying a lot of attention to, is the consumer market. I mean we like to say the Chinese economy, which was growing at above 9 per cent on average during the last four decades, it was mainly driven by number one, exports, and a number two, investment. That is probably somehow going to change given the pandemic, but also other global environment.

I think that the consumer market is going to become a lot more important and sometimes I say, well, maybe we could have said during the last 40 years, China created the two global economic stories. The first story was exports of labour-intensive manufacturing products. There was one time you go out and it's very difficult to find something that was labour intensive, but not made in China. That time is gone now. Then we had a second global story buying a lot of commodities, including commodities from China. These are still ongoing, but I think it gradually will give way to the consumer story. China's retail sales that will probably be the largest this year, exceeding that of the US, but we continue to see rise of consumer spending going forward. Even if economic growth has slowed in the coming years because number one, the saving rate of the household probably will gradually edge down, but at the same time, household income as a share of national income is rising.

So overall I see this as the most dynamic story, and I think it could actually be the next global story that China will be able to contribute to the world economy and that has something to do with the so called shifting of the supply chain. There was a one story, I just saw a survey by Japanese manufacturers in China looking at where they're selling the products. Most of the Japanese companies actually sell more than 80 per cent of their products in the domestic market. So that is a question when you want to consider to relocate away from the Chinese market, where is your consumer? That's something I think it will be very interesting to watch.

Thank you, Phil?

Thanks Renee. I, too, remain fundamentally optimistic about the future. Australia has a fantastic set of underlying fundamentals. And once the virus is contained and we find antivirals or a vaccine, those fundamentals can reassert themselves. Just recently, we've got on top of the health crisis, better than many other countries, our political system has responded in the way we would have hoped it would have, and the economic downturn in Australia has not been as severe as others, and it's not as severe as we expected. Three or four months ago I thought that hours worked in Australia could fall close to 20 per cent. I think the numbers now likely to be close to 10 per cent. So it's not nearly as bad as we've anticipated. Having said that, I think there is going to be a shadow from this crisis that's going to last for perhaps years. I talked about the reasons for that previously. We can move out of that shadow slowly, or we can move out of it quickly.

I think the two things that will help us move out of that shadow, are further advances in technology. And it may be now we're going into an accelerated period of technological progress as people leverage off the new ways of working, it's possible. The other thing that will help us is policy reform. And I talked about the areas previously that would help here. And I've been encouraged recently that the government has moved in a number of these areas. It's talking about industrial relations, it's talked about infrastructure and it's talked about the need to reduce regulation. I think if we can make progress in those areas, then Australia can again look forward to strong and sustainable growth and rising living standards for all Australians.

I fear if we don't leverage the advances in technology and we don't see policy reform, we'll just go on and meander and kind of have slow growth, and slow growth in incomes. But it's not inevitable, and we have the capacity to return to strong growth. And the response that we've seen in the past three four months gives me confidence that we can leverage off those opportunities we have. Australia has done remarkably well over the past few months relative to many other countries, both on the health front, the political cohesion and the economic front. And that should give us all confidence that we can meet the challenges of tomorrow as well. Thank you.

Great. Thank you. So we've come to the end of our time. It's been a pleasure to spend the last hour with our panellists and our Zoom audience, and especially thank our speakers and attendees who are not necessarily in a convenient time zone for staying connected with us. So usually this would be the time that we give our panellists a round of applause and although, we can't hear you, the world needs good karma. So please give our speakers a round of applause at home, thank you.