SOMP: Economy forecast to bounce back in 2022

RBA predicts better economic times next year as restrictions ease, with unemployment falling and no hint of an ‘inflation problem’.

Reserve Bank Governor Philip Lowe is optimistic about an economic rebound in 2022. Picture: Supplied

The Reserve Bank of Australia expects the economy to grow by a robust 4.25 per cent next year, with the unemployment heading down to 4 per cent by the end of 2023, but the conditions for a rise in interest rates would not be met until 2024.

In its quarterly Statement on Monetary Policy, published on Friday, the central bank says the economy entered the current lockdowns in a position of strength and, assuming the nation’s Covid-19 vaccine rollout gathers pace, the recovery will be driven by strong consumer spending and adequate fiscal support.

“Recent outbreaks of the Delta variant across Australia, and the resulting lockdowns, have introduced a high degree of uncertainty to the outlook for the second half of this year,” the RBA said.

“Activity will contract in the September quarter and some job losses are expected. Towards the end of this year, the economy is forecast to rebound from this setback as restrictions ease, as it has from previous lockdowns.

“While the Delta strain is likely to require a more measured reopening of the economy in affected areas than in the past, the Australian economy entered this challenging period in a strong position and fiscal policy is directly supporting households and businesses in the affected areas.

The RBA said lockdowns would reverse recent improvements in the labour market but by next year the unemployment rate would be heading to a level not seen in many years.

“The baseline scenario assumes that the domestic vaccine rollout accelerates in the second half of the year, reducing the frequency and severity of lockdowns and allowing the international border to be reopened gradually from mid-2022,” the bank said.

“This scenario assumes that the Sydney lockdown extends through the September quarter and the lockdown in southeast Queensland ends as planned, with some further brief (and less severe) restrictions assumed to occur in the December quarter. Health outcomes are the main uncertainty for the outlook and will determine when and how quickly the economy bounces back”.

In testimony before a parliamentary committee on Friday, RBA governor Philip Lowe has dismissed worries that consumer price growth will get out of hand, saying that “with wage growth of two-point-something we aren‘t going to have an inflation problem”.

Inflation hit its highest rate since 2008 over the year to June, reaching 3.8 per cent – which economists said would be a temporary spike reflecting Covid-related measures in the middle of 2020.

And speaking this morning, Dr Lowe insisted that it was “very, very difficult to see us having an inflation problem”.

Dr Lowe said the bank’s central forecast was for underlying inflation to be 1.75 per cent over 2022 and then 2.25 per cent over 2023. Wages growth is expected to pick up gradually to 2.75 per cent over 2023, “with growth in other measures of labour costs slightly higher than this”.

He said it “will not be enough for inflation to just sneak across the 2 per cent line for a quarter or two”.

“We want to see inflation well within the target band and be confident that it will stay there. In making our assessments here, we will be paying close attention to growth in wages and broader labour costs. Under the central scenario, the condition we have set for an increase in the cash rate is not expected to be met before 2024.”