End of Australia’s wage subsidy won’t stall jobs recovery, RBA says

Reserve Bank expects the strong pace of jobs recovery means the impact of the end of the JobKeeper wage subsidy will be ‘muted’.

The strong pace of recovery in Australia’s job market is such that the end of the government wage-subsidy program that formed a big part of the overall policy response to COVID-19 is set to be a minor bump in the road for the economy, the central bank says.

In a quarterly update on monetary policy, the Reserve Bank of Australia said the impact of ending the government’s wage subsidy, known as JobKeeper, would be small.

“Employment growth is expected to remain strong over the next few months given solid momentum in activity and buoyant forward indicators of labour demand...suggesting a muted effect from the end of the JobKeeper program,” the RBA said on Friday.

JobKeeper, which kept millions in employment through the worst of the pandemic, was ended by the government in late March. Some economists warned the decision might be premature, tossing many back into unemployment.

The unemployment rate fell by almost 2 percentage points since its peak in July 2020 to stand at 5.6 per cent in March.

The RBA sharply revised down its forecast for unemployment at the end of 2021 to 5 per cent from 6 per cent, adding that it expects the economy to be nearing full employment by the end of 2022. It also upgraded its forecast for gross domestic product growth in calendar 2021 to 4.75 per cent from an estimate in February of 3.5 per cent.

The resource-rich economy has a number of tailwinds, not the least of which is an iron ore price that is close to record highs. The country has also largely contained the COVID-19 virus, allowing economic activity to return to near-normal levels.

Still, the RBA is no mood to talk about raising official interest rates. While the economic recovery since mid-2020 has been the fastest in 70 years, the central bank continues to argue that until wages are growing at a much faster rate, and inflation is sustainably back within its 2 per cent to 3 per cent target band, the need for ultra-low interest rates will remain significant for some time.

“Despite the stronger outlook for output and the labour market, inflation and wages growth are expected to remain low, picking up only gradually,” it said.

Underlying inflation is only expected to be approaching 2 per cent by mid-2023.

Dow Jones Newswires