“Some Years Away”: RBA Talks Down Outlook Despite Improving Data

By Glenn Dyer | More Articles by Glenn Dyer

While the Australian economy is doing better than originally feared in the face of the coronavirus pandemic a senior Reserve Bank official has warned government fiscal and RBA monetary policy (interest rate) help will be needed for years.

RBA deputy governor Guy Debelle told an Economic Society Webinar yesterday despite signs of stronger performance, the economy and country were still going through a historically large decline.

His comments came as another monthly survey (for June) of wages and jobs from the Australian Bureau of Statistics showed a small improvement.

The economy shrank 0.3% in the March quarter – one of the smallest contractions among the world’s major economies in the three month period. The RBA had previously forecast GDP to shrink by 8% for the 2019-20 financial year (ending tomorrow).

Annual growth in the year to the end of March was 1.2%, down from 2.2% at the end of December.

Dr. Debelle said recent data indicated the economy was doing better than feared in March when the COVID-19 pandemic and associated lockdowns brought the economy to a near halt.

Jobs growth is apparent, retail sales have bounced strongly from the big fall in March with a number of leading retailers (JB Hi-Fi, Harvey Norman, Kmart, Officeworks, Kogan.com and Temple and Webster) doing much better than expected with the trade account still solid and the house constriction sector a bit better than forecast.

But all this is before the return of COVID-19 cases in Victoria and the tightening of activity levels and stepped up testing to try and crush the outbreak.

He said while the recession had been caused by measures aimed at stopping the coronavirus, making it very different to past downturns, it was likely the economy would take some time to fully recover.

“Many of the imbalances that exacerbated declines in previous downturns are not present this time,” Dr. Debelle pointed out.

“We should not lose sight of the fact that the decline in the economy and the impact on households and businesses is historically large,” he said. “It is still quite likely that this decline will have a long-lived impact that will require considerable policy support for quite some time to come.

“While much of that support is likely to be on the fiscal side, the Reserve Bank will maintain the current policies to keep borrowing costs low and credit available, and stands ready to do more as the circumstances warrant.”

The RBA has said in the past and Dr. Debelle repeated the forecast yesterday that it does not expect interest rates to start climbing until there is “progress” towards full employment and inflation gets back within the RBA’s 2 to 3 percent target band.

Dr. Debelle signalled that it is not expected to occur any time soon.”Given the outlook for inflation and the labour market, this is likely to be some years away,” he said.

Dr. Debelle said it was more likely inflation would remain below the RBA’s 2% to 3% over time target rather than accelerating, as some old fashioned economists and analysts worry it will.

He said the federal government was also benefiting from record low global interest rates, which were likely to stay below economic growth rates for an extended period.

“Even with the increased issuance to fund the fiscal stimulus, the stock of government debt relative to the size of the Australian economy remains low,” he said.

“The government is borrowing at yields that are very low historically. Importantly, the yields on government debt are considerably below the long-run growth rate of the economy.

“While ever this remains the case … there are no concerns at all about fiscal sustainability from increased debt issuance. This is because growth in the economy will work to lower government debt as a share of nominal GDP,” Dr. Debelle said.

Figures released on Tuesday by the Australian Bureau of Statistics (ABS) revealed a small 1% rise total payroll jobs between mid-May and mid-June.

ABS Head of Labour Statistics at the ABS, Bjorn Jarvis, said in yesterday’s release that: “This continued the gradual recovery in payroll jobs since mid-April (when total job losses were 8.8 percent). However, payroll jobs are still 6.4 percent below mid-March, when Australia recorded its 100th confirmed case of COVID-19.”

“The recovery in payroll jobs between mid-April and mid-June represents around 30 percent of the jobs initially lost,” Mr. Jarvis said. “Between mid-May and mid-June, the easing of restrictions saw payroll jobs increasing faster for the under 20s, up by 4.1 percent.”

“Payroll jobs in the Accommodation and food services industry recovered by more than other impacted industries between mid-May and mid-June (3.8 percent), but remained 28.6 percent lower than in mid-March.”

“Western Australia (2.3 percent) had the largest increases in jobs between mid-May and mid-June, and their total payroll job losses since mid-March were also the lowest, at 4.4 percent.”

Mr. Jarvis added: “Looking at the week to week changes, payroll jobs showed no change in the week ending 13 June. This follows an increase of 0.2 percent in the week ending 6 June.”

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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