Policy tools still effective in downturn: HSBC

Unlike other developed economies, Australia still has a full suite of policy tools at its disposal as it attempts to deal with the current global downturn, according to HSBC chief economist Paul Bloxham.

Interest rates are already close to zero in the US and Japan, and headed that way in Europe, while fiscal policy in those regions has also reached the end of its useful capacity, he said.

If the government can't spend by issuing bonds, then the central bank is left to buy bonds and employ unconventional policies - such as quantitative easing - as the remaining policy levers, he said.

Because Australia's current cash rate is 4.25 per cent and the budget deficit is just 2.5 per cent of gross domestic product (GDP), Australia still has all the conventional policy tools left at its disposal.

Last year's rate cuts, and potential further cuts this year, should see a mild rebalancing of growth in 2012, with the stabilising of interest-rate sensitive sectors such as housing and retail, Bloxham said.

He said there is significant scope for fiscal slippage, while low government debt leaves room for an emergency fiscal package if required. The exchange rate of the Australian dollar also acts as a shock absorber for the economy on the way up and the way down, Bloxham said.