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RBA offers sobering outlook for Australian economy

Reserve Bank of Australia Governor Philip Lowe has pulled few punches when it comes to the immediate future of the Australian economy, noting “over the first half of 2020 we are likely to experience the biggest contraction in national output and income that we have witnessed since the 1930s”.

In a tough-love speech responding to a tough-love Covid-19 national lockdown, Mr Lowe today plainly explained the next few months were “going to be difficult ones for the Australian economy”.

“One very obvious consequence of the efforts needed to contain the virus is that many normal activities are restricted or not permitted,” Mr Lowe said.

“This means that, for as long as these restrictions are in place, we don’t have the jobs and incomes that come from these activities.

“On top of this, there is a high level of uncertainty about the future, which means that many households and businesses are holding back their spending and investment.”

While he foreshadowed a serious contraction of the economy, Mr Lowe was hesitant to put exact figures on what the next few months might bring but noted the RBA’s current thinking was along the following lines:

  • National output is likely to fall by around 10 per cent over the first half of 2020, with most of this decline taking place in the June quarter.
  • Total hours worked in Australia are likely to decline by around 20 per cent over the first half of this year.
  • The unemployment rate is likely to be around 10 per cent by June, although the RBA is hopeful that it might be lower if businesses are able to retain their employees on lower hours.

“These are all very large numbers and ones that were inconceivable just a few months ago. They speak to the immense challenge faced by our society to contain the virus,” Mr Lowe said.

Positives in the pain

Despite painting a “sobering” picture of the economy in the coming months, Mr Lowe was also quick to outline some positives.

“As Australians digest this economic news, I would ask that we keep in mind that this period will pass, and that a bridge has been built to get us to the other side. With the help of that bridge, we will recover and the economy will grow strongly again,” he said.

“Australia’s long record of responsible fiscal policy has allowed the government to use its balance sheet to help smooth out the income shock and to offer protection to those most affected.

“In doing so, it is making a major difference. The strong balance sheets of our banks are also helping. By offering payment deferrals and concessional terms, our banks are rightly acting as shock absorbers and helping the country through this difficult period.

“…the Reserve Bank itself is using its balance sheet to keep funding costs low and credit available to both businesses and households. Without these strong balance sheets, we would have been in a more difficult position.”

Recovery ahead

Turning to the topic of recovery, Mr Lowe took an optimistic stance.

“We can be confident that our economy will bounce back and that we will see it recover. We need to remember that once the virus is satisfactorily contained, all those factors that have made Australia such a successful and prosperous country will still be there,” he said.

That timing and pace will depend upon how Australia needs to restrict its economic activities, which in turn depends on how effectively the nation can contain the virus.

Mr Lowe went on to paint a picture of three possible scenarios.

“One plausible scenario is that the various restrictions begin to be progressively lessened as we get closer to the middle of the year, and are mostly removed by late in the year, except perhaps the restrictions on international travel,” Mr Lowe said.

“Under this scenario we could expect the economy to begin its bounce-back in the September quarter and for that bounce-back to strengthen from there.

“If this is how things play out, the economy could be expected to grow very strongly next year, with GDP growth of perhaps 6–7 per cent, after a fall of around 6 per cent this year.

“Of course, there are other scenarios as well,” he reflected.

“On the optimistic side, the restrictions could be lifted more quickly, with the virus being contained. In that case, a stronger recovery could be expected, particularly in light of the very large monetary and fiscal support that is in place.

“On the other hand, if the restrictions stay in place longer, or they have to be reimposed, the recovery will be delayed and interrupted. In that case, the loss of incomes and jobs would be even more pronounced.”

Mr Lowe noted regardless of the timing and pace of any recovery, the severe shocks Australia is now experiencing would change both consumer and business mindsets.

“Even after the restrictions are lifted, it is likely that some of the precautionary behaviour will persist,” he said.

“And in the months ahead, we are likely to lose some businesses, despite best efforts, and some of these businesses will not reopen.

“There will also be a higher level of debt and some households might revaluate the risks of having highly leveraged balance sheets.

“It is also probable that there will be structural changes in the economy…the crisis will have reverberations through our economy for some time to come.

“As we look forward to the recovery, there is an opportunity to build on the cooperative spirit that is now serving us so well to push forward with reforms that would move us out of the shadows cast by the crisis.

“A strong focus on making Australia a great place for businesses to expand, invest, innovate and hire people is the best way of extending the recovery into a new period of strong and sustainable growth and rising living standards for all Australians.”

A full copy of Mr Lowe’s speech and the RBA response policy is available here

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