So as we head further into the Delta-driven lockdowns in Sydney, the Hunter Valley, southeastern Queensland and Victoria, RBA governor Philip Lowe says it is “quite unlikely” Australia will suffer a recession this year.
Yes, he said on Friday, the central bank expects growth will turn down in the current September quarter, but there should be a rebound in the final months of the year.
But there’s a proviso: the extent of any rebound will depend on the length and intensity of the lockdown and the required vaccination targets being met over the remainder of 20201.
But there was no sign of the dramatic move expected from the Reserve Bank of NZ the week after next and a probable increase in interest rates. That’s still a long way away in Australia.
Dr Lowe made it clear – again – that he and the bank are not looking for rates to rise until 2024 at the earliest (while some of the urgers in the markets reckon late 2022 or sometime in 2023).
Giving evidence to the House of Representatives’ economics committee on Friday, Dr Lowe said while the economy is expected to contract by at least 1% in the September quarter due to lockdowns, it should grow through the final three months of the year.
“I think it’s quite unlikely that we’ll have two quarters of negative GDP,” he said.
“The September quarter will surely be negative, at least 1 per cent and possibly a bigger decline than that depending upon whether there are further lockdowns and how long the existing ones last.
“By the end of the year, many of us will be vaccinated. One hopes the restrictions are being eased from late in this quarter and into next quarter, and as the restrictions are eased the economy should start recovering.
“We can’t rule out two quarters of negative GDP if the health situation deteriorates but I think it’s quite unlikely at this stage.”
Economists like the AMP’s Shane Oliver see a contraction of around 2% for the current quarter but then a solid rebound in the three months to December.
On interest rates, Dr Lowe said the bank was focused on inflation getting back into the RBA’s target band and staying there.
“As I have said previously, the board will not be increasing the cash rate until inflation is sustainably in the 2 to 3 per cent range,” he said.
“We want to see results on inflation before we move, not a forecast of inflation in the target range.
“It will not be enough for inflation to just sneak across the 2 per cent line for a quarter or 2. We want to see inflation well within the target band and be confident that it will stay there,” he said in his opening statement.
While he expects the rebound to pull the economy out the slump, he did wonder about long term uncertainty about how Australia will learn to live with coronavirus when it becomes endemic and whether vaccine-resistant strains will emerge.
“The experience both in Australia and elsewhere is that once restrictions are lifted, spending recovers strongly, especially if people have confidence about the future. While the exact timing of the bounce-back is difficult to predict, it is likely to start well before the end of the year,” he said.
“The vaccination program is ramping up and governments are providing significant targeted income support to help businesses and households get through this difficult period. This means that there is a pathway out of the current difficulties this year.”
In new forecasts contained in the latest Statement on Monetary Policy, the RBA forecast a rise in growth next year with GDP increasing by more than 4%, followed by growth around 2.5% in 2023.
The unemployment rate is expected to fall to 4.25% by the end of 2022 and continue to fall to 4% the year after. Underlying inflation is expected to be running just over 2% in 2023 from the current 1.6%.
But wage growth will lag, gradually rising to 2.75% by 2023 which will be less than the bank’s ambitions if that doesn’t rise further in 2024.A rate of 2.75% only takes wages growth back to late 2014 early 2015.
It is currently 1.5% but economists forecast a rise to closer to 2% (annual) in the June quarter Wage Price Index next week.
