RBA chief Philip Lowe paints grim picture for economy post-virus

Reserve Bank governor Philip Lowe. Picture: AAP

Reserve Bank governor Philip Lowe held back nothing on Tuesday when forecasting the worst conditions for the country’s economy since the Great Depression through the first half of this year.

The global coronavirus pandemic is expected to cut national output by a combined 10 per cent over the first and second quarters, driving up unemployment to 10 per cent by June, its highest level since the country’s last recession nearly 30 years ago.

Inflation is also set to fall. While Dr Lowe downplayed the threat, if the fall in consumer prices is sustained, this risks inviting in a dangerous deflation scare for the economy.

A sharp fall in oil prices, combined with the introduction of free childcare and the deferral or reduction of some price increases, meant it was quite likely that headline inflation would turn negative by fiscal year-end in June, Dr Lowe said.

This would be the first time since the early 1960s for price levels to fall over a full year.

But as gloomy as the RBA’s economic forecasts were, they weren’t the scariest part of Dr Lowe’s speech on the economy.

While some signs of recovery should be visible as early as the third quarter if data on the containment of the virus remained upbeat, the scars of the pandemic on the economy would be visible for years.

“The twin health and economic emergencies that we are experiencing now will cast a shadow over our economy for some time to come,” Dr Lowe said, adding that the world on the other side of COVID-19 might be a lot different as firms and individuals change behaviour and remain cautious for some time.

“It is highly probable that the severe shocks we are now experiencing will change the mindsets of some people and businesses,” he said.

And despite the best efforts to keep the lights on, business failures were inevitable.

The average Australian might also want to reconsider the wisdom of running up household debt, he said.

“It is probable that there will be structural changes in the economy. The crisis will have reverberations through our economy for some time to come,” Dr Lowe said.

Sally Auld, chief economist at JPMorgan in Sydney, said Dr Lowe’s caution about the state of things after the virus was “sobering”.

The outlook suggested that government policy actions, both monetary and fiscal, would be needed to support the economy well beyond the full removal of social-distancing restrictions, she said.

David Plank, ANZ’s head of Australian economics, said the recovery would take longer than the RBA expected, with unemployment staying high for longer.

But as the old adage goes, you should never waste a good crisis.

Dr Lowe used the pummelling of economic activity as a stage from which to reaffirm his call for economic reforms. He has called for meaningful change to boost productivity and help reverse a fall in living standards for some time.

Largely ignored, it seems Dr Lowe has at last won the ear of the government, which plans to grow the economy at a faster pace over coming years to clear debt and restore the country’s gloss.

Dow Jones Newswires