The outlook for Australia’s economy according to the RBA

What’s ahead for Australia’s economy?

While it looked like we were coming out of a deep but short recession rather quickly, we were then hit by an unexpected a second wave of Covid-19 which locked down Victoria.

Obviously this is not good for our economy in the short term – it may knock $12Billion off our economy in the September quarter, meaning previous economic forecasts now need to be revisited.Covid 19 And Economy Recession

The Reserve Bank of Australia lowered its expectations in last Friday’s Statement of Monetary Policy (SoMP) which contains their detailed forecasts on the economy.

The SoMP emphasises the “extreme uncertainty about the course of the pandemic and its economic effects”.

Given that uncertainty the RBA has been publishing three scenarios for the economy: a baseline central view, an upside and a downside.

In their SoMP the RBA revised their growth forecasts down a little and revised their unemployment forecasts up a little to 10%.

Slower growth in the September quarter, possibly even another quarter of contraction, will push out our economic recovery to the December quarter which is likely to put more pressure on Canberra  for economic stimulus.

Rba Forecasts

  • GDP – The economy is expected to contract 6 per cent in the year to December 2020 and rebound 5 per cent in the year to December 2021.
  • Inflation was downgraded by 0.25ppt in 2021 and 2022 with trimmed-mean inflation only expected to be 1.50% by Dec 2022.
  • Unemployment is now expected to peak at 10%, up from 9% and is not expected to fall as quickly as the previous set of forecasts.
  • Wages growth has also been downgraded. In its commentary the RBA notes more than 10% of their business contacts have reported COVID-related wage cuts (significantly higher than during the GFC). Wage freezes have also been implemented for some employees in the public sector and 35% of firms expect wage freezes over the coming year.

Gdp Forecast

Unemployment Forecast


What does all this mean?

Craig James, Chief Economist at CommSec produced an excellent report  giving there interpretation of the SoMP together with Ryan Felsan, a Senior economist.

Here’s part of what the report explained:

Economic forecasting is always fraught with difficulties and that is even more the case in the current environment.

The key factor is how well states, territories and countries manage to suppress the virus.

To date, Australia has been travelling well on this path.

Then came the second wave in Victoria unexpectedly arrived and economic forecasts had to be downgraded.

Fiscal and monetary policy have been working in unison to support businesses and economies.

Screen Shot 2020 08 08 At 10.00.28 Pm

The risk is that support measures may need to be left in place longer and/or that new measures need to be applied.

Around $330 billion (16.2 per cent of GDP) has been outlaid by federal, state and territory governments to support the economy.

The Reserve Bank is now expecting a lower-case ‘v-shaped’ economic recovery.

Gdp Forecast

The CommSec report explained that our economic recovery is expected to be more protracted.

Rather than rebounding at a 7 per cent annual pace in the year to June next year, the lift is expected to be more like 4 per cent.

Unemployment is still tipped to top out near 10 per cent – but later this year, rather than earlier.

Unemployment may still be around 8.5 per cent by the end of 2021, rather than 7.5 per cent.

Interestingly the RBA indicated that the Board considered whether other measures should be considered to support the economy – notably intervening in foreign exchange markets to drive the Aussie dollar lower, and moving to negative interest rates.

Both were rejected.

Bottom-line  is  that  the  RBA  Board  believes  that  current monetary policy measures are sufficient.

But inflation will be lower for longer and unemployment will be higher for longer.

So interest rates will remain at current levels through to 2022.

The Bottom Line

The Commsec report concluded…

Clearly the economic future is more uncertain than usual.

We are in uncharted territory.Economy Momentum

But, notwithstanding issues in Victoria, Australia generally is in good shape compared with other countries.

There is scope for more fiscal stimulus without the debt burden getting anywhere near the levels in the US, UK, Japan and China.

The Reserve Bank believes there is still a role for monetary policy to provide more support if needed.

But options seem to be limited.

That said, in recent days the Bank has returned to the bond market, purchasing short-dated government bonds as part of its Yield Curve Control strategy.

Should it need to, the Reserve Bank could purchase longer-dated maturities or state government (semi-government) – especially Treasury Corporation of Victorian (TCV) – bonds to keep borrowing costs low as governments issue more debt to fund stimulus spending.

But overall, households and businesses aren’t keen to take on debt at any interest rate.

Apart from ‘helicopter’ money drops, reliance will be firmly focussed on fiscal stimulus.

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

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