A better outlook

Still far from upbeat about the economy the Reserve Bank of Australia is more optimistic about conditions than three months ago

6 November 2020 | Richard Colleville

The Reserve Bank of Australia’s (RBA) quarterly Statement on Monetary Policy confirms Australia still faces numerous challenges in the year ahead.

The statement noted the seven per cent fall in June quarter GDP was the biggest peacetime contraction since at least the 1930s. However, “It was nonetheless not as big a fall as had been feared, and was less than that experienced in many other countries.

“The less negative outcome stemmed largely from Australia’s early success in bringing new infection rates down, which allowed restrictions on activity to be eased sooner than earlier thought,” the statement read.

Says AMP senior economist Diana Mousina, “The RBA has upgraded its near-term GDP growth forecasts (out to mid-2021) but left its medium-term forecasts unchanged.

“The peak in the unemployment rate is now expected to be lower at around 8%, down from 10% previously, at the end of this year. The better near-term outlook reflects the improvement in the domestic data over recent months, good management of COVID-19 in Australia and more policy support.”

The RBA expects GDP growth to be 4 per cent lower over the year to Dec-2020 (previously -6%) and 6% higher over the year to Jun-2021 (previously +4%). Says Mousina, “Our near‑term GDP forecasts are a little higher compared to the RBA’s but this is followed by softer growth over 2021 compared to the central bank’s forecasts.

“The RBA forecasts assume that GDP will increase by 5 percent over the year to Dec-2021 whereas we see slower growth of 3.6 percent. Over the year to Dec-2022, the RBA sees GDP rising by 4 percent, while we have GDP growth running at just over 2 percent.”

Unemployment to rise

The central bank is predicting near term unemployment will rise, “partly because some workers who withdrew from the labour force in the early months of the pandemic are expected to return, in response to improving job prospects in some areas and tightening eligibility requirements for JobSeeker.”

AMP Capital’s Diana Mousina concurs with the bank’s forecast of 8 percent unemployment but believes “the unemployment rate peak won’t come until mid-2021 once the JobKeeper program finishes. There is a chance that the Government decides to keep the JobKeeper program on in some form, although at this stage that appears unlikely if virus cases remain low as this means most industries can operate at a high capacity.”

Inflation well below target

Inflation forecasts were left relatively unchanged, except for some changes to headline inflation based on extensions of government subsidies and the announcement of some additional rebates in some states.

Trimmed mean or underlying inflation forecasts are unchanged and assume that low inflation continues over the next few years, with annual growth in the trimmed mean only reaching 1.5 percent per annum over the year to December 2022. The RBA’s forecasts are similar to those produced by the Commonwealth Treasury.

Says Mousina, “We are optimistic about the rebound in growth over the next few months, helped by the re-opening in Victoria, some further state border openings and the magnitude of government and central bank policies in place.

“However, we expect softer GDP growth than the RBA’s projections from mid-2021. There are still many negative factors weighing on the outlook – the JobKeeper program is scheduled to end in March 2021, policies that have kept some households and small businesses afloat (like mortgage deferrals and changes in bankruptcy laws) will end at some point, international borders are likely to remain closed over the majority of 2021 (although the RBA has factored this into their forecasts).

“China/Australia trade tensions are negative for export growth, net migration won’t return to positive levels until some time after 2022 and there is still the risk that there will need to be further lockdowns if COVID-19 cases rise again.”

Significantly, the RBA forecast does not appear to assume a vaccine is available in Australia over the forecast period, assuming instead “enhanced control and management of the virus”.