RBA survey: 63% of experts say Sydney lockdowns could cause another recession

The extended lockdown across greater Sydney could be the catalyst for another Australian recession, according to experts.

In this month’s Finder RBA Cash Rate Survey™, 40 experts and economists weighed in on future cash rate moves and other issues relating to the state of the economy, with all panellists expecting a rate hold for this month.

With greater Sydney set to be in lockdown until at least the end of August, the majority of experts who weighed in* (63%, 19/30) believe that the lockdowns could see Australia enter another recession.

Nearly 2 in 5 (38%, 8/21) of economists think that it could take as little as another two months in lockdown for the recession to hit.

Graham Cooke, head of consumer research at Finder, said all eyes will be on the length of Sydney’s lockdown.

“Economists fear that a prolonged lockdown could push us into recession, and the extension of the measures in Sydney will get us a third of the way there.”

Close to half of respondents who responded (43%, 12) think that Australia’s response to the pandemic has hurt its international reputation.

Uncertainty returns for employment and wage growth

While positivity towards both wage growth and employment surged in July, August saw both of these economic indicators dip significantly.

Finder's Economic Sentiment Tracker gauges experts' confidence in 5 key indicators: housing affordability, employment, wage growth, cost of living and household debt over the next 6 months.
Cooke said it was no surprise that the latest Covid developments had driven sentiment into the ground.

“Last month, we saw positivity towards wage growth spike to its highest point since our survey began. While this has seen a sharp decrease, it’s employment that’s seen the biggest dip, dropping from 71% in July to 29% in August.

“Positive economic sentiment overall has dropped to 14% in August, down from 28% last month,” Cooke said.

Lockdowns could see household debt increase

Half of the experts (52%, 14) believe that household debts will increase due to the recent lockdowns across the country.

Nicholas Gruen of Lateral Economics said it depended on whether Australians received the same support they did last year.

Julia Newbould from Money Magazine said the lockdowns could increase debt marginally if people are unable to work and pay their bills.

“It will, however, stop some discretionary spending,,” Newbould said.

Michael Yardney of Metropole Property Strategists said that without the support of JobKeeper, more Australians are going to find themselves out of work while others will be working fewer hours.

Almost two-thirds of experts don’t think another round of JobKeeper payments will be announced to counteract the most recent lockdowns.

Commentary

Nicholas Frappell, ABC Bullion: "Despite the current run of lock-downs, I expect that lost output can be made up in the post-lock down period and my policy expectations, therefore, remain unchanged."

Shane Oliver, AMP Capital: "The RBA is still a long way from meeting its conditions for a rate hike - namely inflation sustainably back in the 2 to 3% target range which will require full employment and wages growth sustainably above 3%. And the latest coronavirus outbreaks and lockdowns risk delaying progress towards its goals."

Michael Yardney, Metropole Property Strategists: "With over half of Australia in lockdown for part of the last month, our GDP is going to stall, pushing the likelihood of interest rate rises further out."

David Robertson, Bendigo Bank: "The more severe lockdowns required in NSW appear certain to push our economy into contraction this quarter, so the RBA will likely respond to this by adding to QE stimulus (reversing their recent decision to taper stimulus measures). Assuming the lockdowns are effective by September, the economy should then rebound in Spring, especially if government support measures are increased (in line with the severity of the necessary restrictions, to protect jobs). Longer-term our recovery should be strong enough to mean the RBA will increase interest rates in FY23, but for now the focus is on the NSW lockdowns and ensuring that measures are effective, to protect the community."

Sean Langcake, BIS Oxford Economics: "There have been encouraging signs that labour market spare capacity is being absorbed, which would lead to an earlier recovery in wage growth. But the Sydney lockdown will halt this progress. More stimulatory fiscal policy is now required to consolidate the progress already made toward a stronger labour market."

Peter Boehm, CLSA Premium: "There is no scope for the RBA to adjust the cash rate given that around 50% of the population is currently in lockdown. The economic impact of these multi-state lockdowns will be material to GDP, which is expected to drop during the September quarter. The situation in Sydney is likely to worsen before it gets better and this will prolong the negative impacts on economic activity. both in NSW and Australia more broadly. The RBA simply cannot move rates at this time, and has no scope to reduce rates to help boost economic activity - it has played its hand as far as interest rates/monetary policy is concerned."

Saul Eslake, Corinna Economic Advisory: "Although both economic (real GDP) and employment growth have exceeded the RBA's expectations, and I expect they will continue to do so, as the RBA has repeatedly observed, what they call the 'nominal economy' (wages and prices) have not. I expect that the unemployment rate will be down to less than 4.5% by the middle of next year - that's in the territory that the RBA has indicated is likely to be consistent with "full employment" and as such, likely represents a labour market which is sufficiently tight to begin generating the sort of wages growth it thinks is required to push CPI inflation sustainably back into the target band. But that's not going to happen immediately. And the RBA has repeatedly said they're not going to start raising rates until it has happened (as distinct from when the RBA staff start forecasting that it will happen). I think that will be before 2024 - but not that much before."

Craig Emerson, Emerson Economics: "The RBA has indicated it will not increase the cash rate until around 2024."

Mark Brimble, Griffith University: "There is still a long way to go with COVID to get to a firmer future state and thus persistent inflation to start to come through."

Dr. Andrew Wilson, My Housing Market: "Recent questionable speculation of a sooner than current RBA forecast likely next increase in rates has clearly been dashed by the likelihood of protracted lockdown in Sydney and ingoing restrictions in other capitals"

Tim Nelson, Griffith University: "With COVID impacts likely to linger through 2021 and 2022, monetary policy is likely to be unchanged until 2023 or beyond."

Tony Makin, Griffith University: "Incoming months a clearer picture will emerge of underlying inflation trends both in the US and here. The recent US inflation spike is unlikely to be temporary given the massive money supply increase, recovery from the pandemic, and substantial US fiscal expansion. Meanwhile, bond yields will sooner rather than later increase as governments keep borrowing at historically high levels to roll over past debt and to fund huge ongoing budget deficits."

Tom Devitt, Housing Industry Association: "Sustained inflation/wage pressures won't be generated before [2023], to justify a rate increase."

Leanne Pilkington, Laing+Simmons: "The risk of the recession on account of the lockdowns, particularly in Sydney, necessitates a continuation of the RBA’s previously stated course as attention turns to the stimulus measures available."

Nicholas Gruen, Lateral Economics: "Tightening has been delayed by lockdowns."

Mathew Tiller, LJ Hooker: "The RBA has publicly stated that it intends to keep the Cash Rate at the current record low level, despite the release of some positive economic data and strong property price growth."

Geoffrey Harold Kingston, Macquarie University: "Having previously nominated Q4 2022, I now think the current Delta outbreak will probably push the next rate rise back to 2023."

Jeffrey Sheen, Macquarie University: "Slow vaccine rollout and repeated lockdown response will delay the full economic recovery needed before interest rates will start rising."

Mark Crosby, Monash University: "Still the case that any rate increase in 2022 would be earlier than expected."

Susan Mitchell, Mortgage Choice: "The latest labour market data is strong, showing the economic recovery continues but I don’t expect any change to the cash rate in the near-term. I expect the RBA Board members will continue to monitor the impact of extended lockdowns in New South Wales."

Malcolm Wood, Ord Minnett: "It will take time for the RBA's target of inflation sustainably in the target band to be achieved."

Matthew Peter, QIC: "The RBA has time to evaluate the impact of the Sydney lockdown and the potential ongoing lockdowns that may occur due to the spread of the delta variant. At its August meeting, the RBA will reiterate their rate guidance for a 2024 lift off - and no sooner. They will maintain their QE program, but will highlight their option to extend the program beyond November."

Noel Whittaker, QUT: "Nothing will happen in the short-term – but a reasonable expectation would be that the economy is back to normal within a year."

Jason Azzopardi, Resimac: "Wage growth will drive higher inflation."

Christine Williams, Smarter Property Investing: "The RBA will assess money globally before increasing, as long as APRA's strategy around borrowing serviceably stalls the property market. If it does not, I believe the RBA will increase by QTR 1 2022."

Mala Raghavan, University of Tasmania: "The cash rate will not rise till mid-to-late 2023. The reason being, inflation and wage pressures are subdued, contributed by (i) high underemployment, causing excess capacity in the labour market; (ii) slowing labour productivity growth; (iii) restructuring of the labour market due to technological progress; and (iv) competitive pressure from internationalization. All the above weakens the labour market's bargaining power."

Jonathan Chancellor, Urban.com.au: "The RBA insists their first move up is still a long way off, and the latest lockdown impacts will contribute to that delayed outcome."

Dale Gillham, Wealth Within: "The current COVID outbreak has slowed our economy once again and whilst we may be able to avoid going back into a recession, it will be close. Given this it is highly unlikely the RBA will move to increase interest rates in the next six to twelve months, whilst in the short term they may consider moving them lower, although I do not think they will."

Jakob B. Madsen: "The RBA has committed to a fixed-rate policy for the near future. But eventually it has to increase the rate to follow increasing interest rates in the world."

Julia Newbould: "As inflation is rising in the US faster than expected, it will impact the decision that the RBA will make. I think it will bring forward the start of interest rate rises."

Other participants: John Hewson, ANU. Peter J Tulip, CIS. Angela Jackson, Equity Economics. Alex Joiner, IFM Investors. Alan Oster, NAB. Bill Evans, Westpac.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.