While the Reserve Bank has revised upwards its forecasts for the Australian economy, predicting it will now contract by a still substantial 4% in the year to the December,’ the outlook remains weak-looking into 2021.
In fact, the RBA still doesn’t expect the economy to be back to pre-pandemic levels of late 2019 until the end of next year. And getting there is not going to a smooth, even path.
“The recovery can be expected to be bumpy and uneven, and highly sensitive to further virus outbreaks,” the RBA predicted.
In its quarterly monetary policy statement released on Friday, the bank upgraded a range of forecasts including household consumption, unemployment and public demand.
As expected the forecasts in the 4th and final Statement on monetary Policy for 2020 are far more upbeat than in August, or especially in the May statement when it was doom and gloom and gloom as the pandemic settled over the country.
In its August Statement on Monetary Policy, the bank was tipping minus 6% economic growth to the December quarter. It also expected minus 7% household consumption, minus 14% dwelling investment and an unemployment rate of 10%.
They have all been substantially revised upwards and for the better.
In the bank’s central scenario (the one favoured) GDP is expected to contract by around 4% over the year to December, but then grow by 5% over 2021 and 4% over 2022. The unemployment rate peaks at a little below 8% in coming months, before gradually declining in 2021 and 2022 to just above 6% at the end of the forecast period in 2023 (and still above the end of 2019 level).
Inflation is expected to pick up a little alongside a modest reduction in spare capacity, to be around 1.5% by the end of 2022. Dwelling investment will be down 12% by the end of 2021, recovering to be flat in 2021. The household investment will now be down around 5% before zooming up 13% in 2021.
The RBA said in the statement:
“The baseline scenario for GDP growth has been upgraded a little relative to the August Statement. This reflects stronger-than-expected household consumption and additional policy support (including that announced in the Australian Government Budget), though a downward revision to resource exports has partly offset the firmer outlook for domestic demand.”
“Even after the GDP forecast upgrade, the severity of the downturn in the first half of the year means that GDP is not expected to return to its pre-pandemic level until the end of 2021.”
“Conditions in the labour market have improved a bit faster than expected at the time of the August Statement but remain soft overall.
“Employment remains well below its pre-pandemic level and measures of labour market underutilisation are high. Growth in employment is expected to be subdued over the next few months, as policy support measures, such as JobKeeper, are tapered.
“The unemployment rate is anticipated to peak at a little below 8 per cent, above current levels but lower than the 10 per cent peak that was previously expected.
“The unemployment rate is then expected to gradually decline, with employment expected to grow steadily and more people expected to be drawn back into the labour market; the unemployment rate is expected to remain above pre-pandemic levels at the end of the forecast period.
“Substantial spare capacity, including high underemployment, is likely to keep wages growth and inflation low for a considerable period,” the RBA said.
But as the bank again made it clear there’s no move to introduce negative interest rates, as it again said in this week’s momentous statement revealing a new rate cut, the start of QE and more yield control targeting.
“The (bank) board considers that there is little to be gained from short-term interest rates moving into negative territory and continues to view a negative policy rate as extraordinarily unlikely,” it said.