Recovery from ‘shock without modern precedent’ will take ‘several years’: RBA

The latest Reserve Bank forecasts show that the Victorian lockdowns have sunk hopes of a smoother recovery from the COVID-19 recession

Reserve Bank assistant governor Luci Ellis. Picture: Aaron Francis

Reserve Bank of Australia assistant governor Luci Ellis says the Australian economy will now take “take several years” to return to its pre-pandemic path, as the Victorian lockdowns bury hopes of a smoother recovery from the COVID-19 recession.

Speaking almost immediately following the release of the RBA’s latest quarterly economic outlook, the Statement on Monetary Policy (SOMP), Dr Ellis described the hit from the health crisis here and abroad as a “shock without modern precedent”.

The central bank’s economists calculate the cost of the Victorian second wave of infections and associated intensified social distancing measures will reduce growth in national real GDP by 2 percentage points over the September quarter, compared to Treasury’s preliminary estimate of 2.5 percentage point hit, as revealed by Scott Morrison yesterday.

“The situation in Victoria will reduce growth in the September quarter and push out the recovery beyond that,” Dr Ellis said.

A shallower initial hit from the pandemic, but a longer and bumpier road to recovery under the RBA’s new “baseline scenario” revealed in the latest SOMP leaves the economy contracting by 6 per cent this year – the same estimate as three months ago. But there will be a weaker rebound in 2021 of 5 per cent, versus the May forecast of 6 per cent.

Despite the estimated $10bn cost to the economy in this quarter from the stage three and four lockdowns, the head of the RBA’s economics department backed the severe Victorian restrictions, saying “getting on top of the virus is what will enable a strong recovery”.

“What we have seen around the world is economies that haven’t had a good handle on the virus but have not restricted activity haven’t really had any better economic performance than those that did a very quick lockdown,” she said.

And outside Victoria, “activity is expected to continue to recover in much of the country over the rest of this year and next,” Dr Ellis said.

Still: “The recovery is expected to be slow and uneven, and GDP will probably take several years to return to the trend path expected prior to the virus outbreak”.

Faster than trend growth will continue in 2022, with the RBA expecting real GDP to grow by a further 4 per cent in that year.

The jobless rate will still peak at close to 10 per cent, but in December rather than June, the new forecasts show. Unemployment is expected to end next year at 8.5 per cent, or 1 percentage point higher than previously expected, and will only fall to 7 per cent by December 2022.

“Progress on reducing unemployment will be slower” than previously expected, Dr Ellis said.

The central bank’s central case is that the Victorian shutdowns successfully contain the spread of the virus. The state’s restrictions will be lifted in September, and the rest of the country continues to progressively ease social distancing measures over the final months of the year.

In contrast, the RBA’s “baseline” scenario for the economy in May had assumed most restrictions, aside from very large gatherings and public events, would be lifted by the end of September.

In its latest outlook, the RBA has also become more pessimistic over when the international border will open, delaying this by six months to the middle of 2021 amid evidence globally of second waves of infections.

The central bank once again presented worst and best-case outcomes.

A “possible” upside scenario also assumes new infections in Australia are brought quickly under control and stay low, but it happens at a faster pace that allows a quicker loosening of restrictions and a faster recovery. In this scenario, unemployment would peak below 10 per cent and fall to 6 per cent by the December 2021.

However, the bank also detailed a “plausible” downside scenario which assumes infection rates continue to escalate around the world this year and next, and that Australia suffers a series of outbreaks accompanied by periods of stage three or four restrictions in some states.

In this world, the government’s fiscal support measures have little effect, as consumption continues to fall through the second half of 2020, “despite continued policy stimulus and income support measures”.

Such an outcome would have a devastating impact on the employment forecasts, with the jobless rate staying at around 10 per cent through all of 2021.

The RBA expects annual inflation to jump to 3 per cent by the middle of next year – reflecting the June quarter’s intense deflation as childcare was made free and petrol prices plummeted – before easing back under 2 per cent over the falling months.

Consumer price inflation will only be 1.25 per cent in 2020, and inflationary pressures will not reappear over the RBA’s forecast horizon and will be 1.5 per cent by December 2022.

“Inflationary pressures are likely to remain subdued globally for some time because of considerable spare capacity, though in the longer term there is more uncertainty over the inflation profile given supply will also be lower,” the RBA said.

Overnight the government announced changes to JobKeeper to ensure businesses newly affected by the Victorian restrictions would be eligible for the key wage subsidy scheme, at an additional estimated cost of $15bn.

The move to ease eligibility requirements came after Scott Morrison yesterday released Treasury figures which suggested the hit to the national economy from the Victorian shutdowns would run to $10-12bn and cost up to 400,000 jobs; a “heavy blow” which meant GDP would shrink by 1 per cent in the September quarter.

Josh Frydenberg on Friday morning said that “the Morrison government is pulling out all stops, doing whatever we can to support Australians through the crisis to maintain that formal connection between employers and employees to help businesses and workers get to the other side.

“There certainly will be a much larger number of Victorian businesses and workers who will now benefit,” he said.