The Reserve bank moved to further ease monetary policy even though there are clear signs the economy is doing much better than thought in August (when the last set of forecasts were issued) and much, much better than in May when it looked as though the pandemic and lockdowns would flatten everything
Nothing like that has happened – exports remain solid, housing and housing investment has recovered with government help (state and Federal), some sections of retail sales have maintained or exceeded previous growth levels – others have been hit hard, such as cafes.
But jobs growth and wages remain weak, household consumption is being supported by the likes of Jobkeeper and tax cuts, wage rises are remote and being cut (the NSW government cutting its allowable increase to just 1.5% when it should be boosting incomes).
The big plus is that the virus is now under control after the Victorian breakout was hauled back.
The second wave in Victoria knocked the economy, but so far the impact seems to have been contained to that state and the damage wasn’t as bad as the alarmists in the media, politics and some areas of the markets claimed it would.
Yesterday’s statement pointed out that while the global economy has been recovering from the initial virus outbreaks, the recovery is most advanced in China but elsewhere, output in most countries remains well short of pre-pandemic levels.
In fact, the eurozone is now forecast to slip back into negative growth this quarter because of the latest lockdowns and outbreaks of the virus.
On top of this, the recent virus outbreaks pose a downside risk to the outlook, particularly in Europe. Not to mention the US where infection levels continue to soar.
But the Australian economy seems to be recovering – not rebounding. As Deputy Governor, Guy Debelle said last week positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria.
“It will, however, take some time to reach the pre-pandemic level of output” the bank stated yesterday.
News forecasts considered at yesterday’s meeting and to be released on Friday in the 4th and final Statement on Monetary policy for the year confirm the still weak nature of the recovery.
In the central scenario, GDP growth is expected to be around 6% over the year to June 2021 (4% in the August forecast) and 4% in 2022 (unchanged from August).
Unemployment is expected to remain high, but to peak at a little below 8%, “rather than the 10 percent expected previously,” the bank said on Tuesday
At the end of 2022, the unemployment rate is forecast to be around 6% (7% in the August forecasts).
“This extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years.”
“In underlying terms, inflation is forecast to be 1 percent in 2021 and 1½ percent in 2022. In the most recent quarter, year-ended CPI inflation was 0.7 percent and, in underlying terms, inflation was 1¼ percent (unchanged, meaning inflation will not be back to the target rate of 2% to 3% until at least 2023 and probably later).
“The Board views addressing the high rate of unemployment as an important national priority. Today’s policy package, together with the earlier measures by the RBA, will help in this effort. The RBA’s response is complementary to the significant steps taken by the Australian Government, including in the recent budget, to support jobs and economic growth,“ The statement read.
“The combination of the RBA’s bond purchases and lower interest rates across the yield curve will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets.
“At the same time, the RBA’s Term Funding Facility is contributing to low funding costs and supporting the supply of credit to the economy. T
“Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. For its part, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range.
“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market.
“Given the outlook, the Board is not expecting to increase the cash rate for at least three years.
“The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation.
“The Board is prepared to do more if necessary,” the statement added.
