Coronavirus: early easing opens up a rosy outlook, says RBA

A faster-than-expected withdrawal of restrictions could limit economic losses, opening the door to a rosier set of forecasts.

A faster-than-expected withdrawal of restrictions as flagged by Scott Morrison on Friday could limit economic losses, opening the door to a rosier set of forecasts as Australians head back to work.

The Reserve Bank — in its first quarterly update since parts of the economy were shut down in March — modelled three econo­mic scenarios in view of “extreme” uncertainty hanging over the economy.

Unemployment rate forecast scenarios GDP

They included a more optimistic scenario in which “most containment measures were phased out over coming months”.

If this scenario unfolds, much of the economic damage from the COVID-19 lockdown could be reversed­ by July next year and the jobless rate could settle at about 5 per cent by the middle of 2022.

“A stronger economic recovery would be possible if further gains in controlling the virus were achieved in the near term and most containment measures were phased out over coming months,” the Reserve Bank said.

“This, alongside the considerable policy support already in place, would help limit near-term damage to business and household balance sheets, and help drive a more rapid recovery in the economy.”

Labor Treasury spokesman Jim Chalmers seized on the document, pointing out that — under the RBA’s “baseline” case — the jobless rate would remain above 6 per cent for the next two years.

“Even under the Reserve Bank’s most optimistic scenario, the unemployment rate is not ­expected to return to its pre-COVID level for a couple of years, which will have devastating consequences for so many families and communities,” Dr Chalmers said.

In its baseline case, the RBA forecast a 10 per cent drop in economic output in the June quarter — “the largest three-month fall in the history of the quarterly national accounts” — ahead of a rebound that leaves the economy 6 per cent smaller at the end of this year compared with December last year. Household consumption would also be expected to fall 15 per cent.

Regardless of which scenarios prove more accurate, the central bank expects unemployment to peak at just above 10 per cent by the middle of this year.

“The initial contraction in activit­y has been driven by necessary public health measures rather than the economic and financial developments that are typically involve­d in sparking economic downturns, so the speed and shape of the recovery could differ from the experience in the past,” the statement said.

Goldman Sachs chief econo­mist Andrew Boak said the RBA’s downgrades to the growth outlook — from 2 per cent GDP growth over the year to June to minus 8 per cent — were “broadly in line with expectations”.

“We continue to think that rates will remain at the lower bound for many years, with fiscal policy doing more to manage aggreg­ate demand,” he said.

AMP Capital chief economist Shane Oliver said: “With the governme­nt appearing to move down this faster reopening path, a stronger recovery is possible”.

Earlier this week the RBA board, as expected, kept pol­icy­ unchanged, having purchased more than $50bn in state and federal­ government bonds since March.

“The board will not increase­ the cash-rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band,” it said.

The statement anticipates the inflation rate will drop below zero in the June quarter. The RBA cut the cash rate in March to a record low of 0.25 per cent and launched a quantitative-easing program to keep long-term interest rates low.

JPMorgan chief economist Sally Auld said the statement made for a “sobering read”.

“We assume the following probabilities for the RBA’s scenarios: 60 per cent base case, 25 per cent slower recovery and 15 per cent faster recovery,” she said.