Reserve Bank views coronavirus as a material risk to the economy

RBA warnings of risks from the coronavirus outbreak suggest it may need to lower GDP forecasts if the crisis deepens.

The Reserve Bank of Australia building in Sydney. Picture: AAP

The Reserve Bank of Australia has warned the coronavirus outbreak represents a material risk to the outlook for the economy, which is on a 28-year run without a recession.

“The coronavirus was a new source of uncertainty,” minutes of the RBA’s February 4 policy meeting said on Tuesday.

“While it was too early to tell what the overall effect would be, the outbreak presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australian economy.”

The comments suggest the RBA may need to lower its forecasts for GDP growth in 2020 if the crisis surrounding the virus deepens. The virus threat comes as Australia moves to recover from catastrophic fires in recent months.

The RBA is forecasting GDP growth of 2.75 per cent in 2020, and 3.0 per cent in 2021.

Attempts to contain the coronavirus have already massively disrupted China’s economy, with some economists forecasting spillover effects could see Australian growth slow to a crawl in the first three months of the year, or even contract.

Australia is highly exposed to any downturn in world trade, with more than one-third of all its exports going to China. If the virus continues to disrupt growth, Australia’s 28-year growth run--the longest ongoing expansion in the developed world--could be put at risk.

Still, RBA Governor Philip Lowe told a conference in Melbourne last week that the hit to growth from fires and the coronavirus is likely to be brief, before the economy returns to what he has described as a gentle recovery.

The RBA board decided to keep interest rates on hold at the February 4 policy meeting, while weighing the pros and cons of cutting the benchmark interest rate from its current record low of 0.75 per cent.

“The board also recognised that the incremental benefits of further interest rate reductions needed to be weighed against the risks associated with very low interest rates,” the minutes said.

The RBA said it is looking overseas to instances where cutting interest rates had affected resource allocation and confidence.

After interest rates were cut three times in 2019, house prices have already begun to rise quickly. That’s something that will be watched closely by the RBA, which has warned about the risks associated with record household debt at a time when wage growth has been flat over a number of years.

“A further reduction in interest rates could also encourage additional borrowing at a time when there was already a strong upswing in the housing market,” the minutes said.

Housing auction data from the weekend showed boom conditions returning in major Australian capitals, with 80 per cent of properties offered for sale successfully sold. In early 2019, auction clearances were at 50 per cent or below.

The RBA will watch trends in the job market to determine the direction of interest rates from here. Data on Thursday are expected to show the unemployment nudging a little higher in January, with economists expecting overall job creation to be weak.

Dow Jones Newswires