RBA Sees Consumption Down 15%, Restrictions Key to Recovery
RBA Sees Consumption Down 15%, Restrictions Key to Recovery
(Bloomberg) -- Australia’s central bank said household spending is likely to slump about 15% in response to the lockdown to stem the spread of the coronavirus and the outlook beyond the first half of this year depends on how long those restrictions last.
“In Australia, output is expected to contract significantly over the first half of 2020, mostly in the June quarter,” the Reserve Bank of Australia said in its quarterly update of the economic outlook released in Sydney Friday. “While the exact size of the contraction is still uncertain, a decline in GDP of around 10 percent from peak to trough is expected.”
The bank’s baseline scenario has most restrictions lifting by the end of the third quarter, aside from limits on very large public gatherings and international travel. Under this scenario, economic growth “is expected to start recovering in the second half of 2020, led by consumption.” It sees unemployment at 10% in June, easing back to 7.5% at the end of 2021.
The key near-term estimates were already largely laid out in Governor Philip Lowe’s comments in Tuesday’s interest-rate statement and his last speech in April. The Australian dollar was little changed in response and traded at 65.39 U.S. cents at 12:35 p.m. in Sydney.
“The forecasts highlight the strong likelihood that monetary policy settings will remain very accommodative for a number of years,” said Sally Auld, a senior strategist for interest rates at JPMorgan Chase & Co. in Sydney. “Even as of June 2022, the bank’s forecasts for the unemployment rate and core inflation are well away from desired targets.”
Australia is expected to record its deepest economic contraction since the 1930s and exports slump 10% in the year through June as many service industries are shuttered to stem the virus’s spread. Authorities are preparing to relax the restrictions -- after more than six weeks of lockdown -- now that infection rates are slowing.
‘Upside Scenario’
“Given the relatively rapid decline in the number of new COVID-19 cases in Australia, it is possible to contemplate an upside scenario,” the RBA said. “In such a scenario, the unemployment rate could return to around 5 percent in a couple of years.”
The Australian dollar and stock market have strengthened in recent weeks as confidence has grown in the government’s handling of the crisis and signs mount that the economy will soon emerge from the shutdown.
The RBA, at the peak of market turmoil, slashed its benchmark rate to near zero and began buying government bonds to bring the three-year yield down to 0.25% and help restore dislocated markets. It has managed that successfully, with the yield anchored around the target, and has since scaled back purchases to three days a week.
At its regular monthly board meeting this week, the RBA kept the cash rate and yield objective unchanged, while broadening securities eligible for its daily liquidity operations to assist the functioning of capital markets and keep rates down across the economy.
“The board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 percent target band,” the bank said. The RBA’s forecast table showed deflation of 1% in the year through June.
The government boosted spending to also help firms and households through the crisis, including paying wage subsidies to keep workers connected to their employers. Together, the fiscal-monetary package amounted to 16.4% of gross domestic product.
“The bank’s liaison program also indicates that many firms are deferring or canceling non-essential planned capital expenditure in response to the deterioration in the Australian economic environment,” the statement showed. The statement showed business investment was expected to slump 13% in the year through December and dwelling investment 17% through June.
Australia’s tourism and education exports, which together account for about 5% of GDP, are likely to face a prolonged period of weakness due to the restrictions on international travel.
This could be made worse by China, Australia’s key trading partner, being on track for its worst growth outcome in the post-Mao era, as the impact of shutdowns to curb the coronavirus outbreak at home is compounded by a slump in global demand as the pandemic spreads. Still, the RBA showed some confidence that major supply-disruptions had been avoided.
“More recent indications from liaison suggest the earlier concerns about supply disruptions to imported goods are receding, both because Chinese economic activity has picked up and domestic demand has weakened,” it said.
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