Reserve Bank warns of slow recovery from coronavirus crisis

Economic damage to Australia from the coronavirus pandemic will take years at best to reverse, the Reserve Bank has warned.

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

Economic damage from the largest three-month fall “in the history of the quarterly national accounts” will take years at best to reverse, the Reserve Bank says in its latest quarterly economic statement.

In the statement, the RBA forecasts the economy to contract 6 six per cent in calendar 2020, with the jobless rate soaring to around 9 per cent by the end of the year.

The RBA has forecast a 10 per cent drop in economic output in the June quarter and a rise in unemployment to just above 10 per cent. The latest economic update also predicts deflation in the second quarter 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.

The RBA has modelled three scenarios for the economy in the wake of the coronavirus pandemic, given the high level of uncertainty.

“A stronger economic recovery is possible, however, if further gains in controlling the virus are achieved in the near terms, allowing most containment measures to be phased out over coming months and with more limited damage to business and household confidence and balance sheets,” it said.

“Much of the near-term decline in GDP growth and the rise in the unemployment rate would be reversed over the next few years,” it added.

In the worst case scenario the jobless rate remains at almost 8 per cent in the middle of 2022 and the economy about 2 per cent smaller than it was in late 2019.

The RBA’s baseline projections put the unemployment rate at 7.5 per cent by the end of 2021, still well above the nearly 5 per cent rate at the start of this year.

The outlook confirms the RBA expects many jobs to be lost permanently as companies close due to virus-related lockdowns.

Still, the outlook would be much worse had it not been for the government’s $130 billion wage-subsidy scheme, the RBA said.

The bleak jobs outlook comes despite the RBA predicting a solid recovery for economic growth in 2021, with calendar-year growth expected at 6 per cent.

Core inflation is expected to remain below the RBA’s 2 per cent - 3 per cent target band for a long time, locking in record-low interest rates for many years.

The RBA’s outlook is consistent with payrolls data published by the Australian Bureau of Statistics this week that showed one million Australians have lost work as a result of the pandemic.

The RBA expects total hours worked to decline by around 20 per cent in the second quarter, while headline inflation is expected to be negative as a result of lower fuel prices and a decision to make child care free. Underlying inflation is expected to decline notably.

“The outlook for the domestic economy depends on how long social distancing remains in place and its effects on economic activity,” the RBA said.

With James Glynn