Economy poised for rapid rebound: RBA

Reserve Bank governor Philip Lowe says the rapid digital transformation of the Australian economy through the pandemic has created an opportunity for businesses.

Governor of the Reserve Bank of Australia Phillip Lowe. Picture: AAP

Reserve Bank governor Philip Lowe said the Australian economy was poised for a “rapid rebound” from the Covid recession if the nation can keep the virus under control, given the pent up savings and massive financial stimulus washing through the system.

The central bank boss has urged Australian businesses to be brave and “seize the opportunities” of the digital transformation of the Australian economy in wake of the COVID-19 crisis.

Speaking at a CEDA event on Monday night, Dr Lowe also delivered an upbeat assessment of the economy, saying Australia was “on the road to recovery”, and there was the potential to bounce back quickly should the health situation continue to improve.

And as Adelaide reported a cluster of new coronavirus cases on Monday, Dr Lowe warned there was still “considerable uncertainty about the outlook”. But he said there was “resilience” built into the system.

“Its been remarkable that in six months there’s two or three vaccines that are in advance stages of development,” Dr Lowe said in response to questions.

“I’m encouraged by that...Its plausible that a vaccine be widely available and we start to get back to normal some time over the next couple of years”.

“There’s a fair chance the scientists could actually pull this off”.

He also noted that despite the downturn, household balance sheets were in good shape and this was being aided by “a lot of stimulus in the system”.

With the savings rate running at 20 per cent in the June quarter, Dr Lowe said “I hope that we get improving news on the health front and people will have the confidence to spend that”.

“If we can keep the virus under control with the stimulus in the system and the good balance sheet I think we can come back strongly”.

However he cautioned that this could change rapid with Europe now battling devastating effects of a second wave and in some cases a third wave of the Covid virus.

The RBA governor said the accelerated shift to a more digital economy this year “is prompting firms to innovate and to find new ways of doing things,” and that there would be rewards for firms which could adapt to the new reality.

“They (businesses) are having to compete to come up with new products and new ways of delivering them. This innovation and competition will have a positive pay-off for our economy. It will take time to realise the full benefits, but as businesses are re-engineered to become more digital we will all see the benefits in terms of higher productivity.”

But Dr Lowe warned that a potential legacy of the COVID-19 recession could be a heightened unwillingness by business owners and entrepreneurs to take on risk and invest during a period of significant upheaval.

“We all know that businesses need to take risks to innovate and grow,” he said. “I understand that in an uncertain world, it can be hard to take on risk and there can be a natural tendency to avoid new risks. But, if businesses are to seize the opportunities that are out there to grow and to increase Australia’s productive capital base, some degree of risk-taking is necessary.”

“The combination of necessity, new technologies and the easing of regulations has made a real difference,” he said.

“Digitalisation is not only helping Australians deal with the pandemic, but it will also boost productivity and can help drive future economic growth.”

Dr Lowe pointed to a number of examples where the pandemic had forced a change in the way businesses and households operate – including the uptake of telehealth and the availability of medical prescriptions. Companies have been allowed to hold virtual annual shareholder meetings for the first time. The sharp increase in Australians working from home has reduced commuting time, while online sales have surged 80 per cent during the crisis.

“Progress that otherwise would have taken years has been made in a matter of months,” he said.

After slashing rates to 0.1 per cent and launching a $100bn bond-buying program at a historic Melbourne Cup day board meeting, Dr Lowe again committed to an extended period of easy money, saying “the challenge facing Australia over the next few years is much more likely to be the creation of jobs, rather than controlling inflation pressures”.

“The board wants to do what it can, with the tools that it has, to support the national effort to reduce unemployment,” he said.

But the governor also noted that “the recent data have been better than expected and the easing of restrictions has lifted spirits” – a likely reference to a recent survey which showed consumer confidence had hit seven-year highs.

“Further good news on a vaccine and rapid testing would also help. There is a lot of stimulus in the system, balance sheets are generally in good shape and governments are providing substantial incentives for firms to invest and employ people. So if we do get further good news on the health front, we could have a rapid rebound.”

Despite the positive signs, Dr Lowe said it was “highly probable that one of the marks the pandemic will leave is an extended period of higher unemployment than we have become used to”, and that addressing this legacy of heightened joblessness was a “national priority”.

“Over the medium term, I do expect to see a time when Australia’s strong economic conditions once again justify higher interest rates,” Dr Lowe said. “But today, during a global pandemic when a lot of people have lost their jobs and many businesses are struggling, is not the time for that.”

Dr Lowe pointed to Australia‘s vaunted outperformance against its global peers, but said the “gravitational pull” of ever looser monetary policy overseas through the COVID-19 crisis forced the RBA to cut rates to virtually zero earlier this month.

Dr Lowe said “if we had sought to ignore this gravitational pull, there would have been obvious implications for our exchange rate and our economy”.

Higher rates in Australia, especially for longer term government bonds, would have pulled offshore money into Australian assets and forced up the Aussie dollar.

“In turn, this would make it harder to make the needed progress on jobs.”