Australia faces a deep third-quarter GDP contraction – RBA board member

Reserve Bank of Australia board member Ian Harper. Picture: Stuart McEvoy

A deep contraction in Australia’s economy in the third quarter looks unavoidable, and significant uncertainty hangs over the fourth quarter due to lengthening lockdowns across major cities, said Ian Harper, dean of Melbourne Business School, and Reserve Bank of Australia board member.

Still, surging vaccination rates offer hope of a rebound in growth that could be more powerful than anything yet seen during the pandemic, he said Mr. Harper, who does not speak on behalf of the central bank, told The Wall Street Journal that the RBA determined this week not to change course on its plans to reduce its government bond buying in September, as it would have amounted to “fine tuning” of monetary policy and run the risk of unleashing more stimulus just as the economy is emerging from lockdowns.

“We’ve probably already booked a negative September quarter. It could be as much as minus 1% for GDP. It’s going to be quite deep and sharp,” Mr. Harper said.

Many economists are predicting a big contraction in GDP growth in the third quarter as lockdowns shut in activity across greater Sydney and in other cities elsewhere in Australia.

In Sydney, which contributes around 25% to national output, lockdowns have been in place since late June, with stubbornly high daily case numbers suggesting harsh curbs on mobility could stretch well into September.

Still, Mr. Harper is hopeful of a rebound.

“The experience coming out of last year was that bounce backs are much stronger than expected,” he said. “We’ve gotten used to dealing with these situations, so you might expect the next snap-back to be even stronger.” Household and business balance sheets are in good shape, and unemployment is currently below 5%, albeit some reversal is likely in the near term, Mr. Harper said.

“So when the restrictions are off, there’s a whole lot of pent-up pressure that’s going to push us straight back up,” he said. “My guess is we won’t see a negative December quarter. We will see a snap-back.” Mr. Harper expects the Australian population to be 80% fully vaccinated against Covid-19 by around the end of 2021, something that will spur GDP growth through 2022.

While the Delta variant of the Covid-19 virus poses a new and heightened threat to the economy, it is also driving vaccination rates upward, bringing policy makers closer to the moment when strict lockdowns won’t be required, he said.

With plenty of stimulus already in the economy, there wasn’t a strong case for the RBA to suspend plans to taper its government bond buying this week, he said.

Financial markets anticipated that the RBA would decide to not pull back on the pace of bond buying in September as announced, which would display its ability to be flexible in the face of fresh uncertainty around the economic outlook.

Instead, the RBA said it will push on with its plans, while also acknowledging rising health risks within the community.

“The impact of that would have hit at precisely the moment the economy was already recovering quickly,” Mr. Harper said. “All you would be doing is pouring lots of fuel into an open carburettor.

“You can’t fine tune these things,” he added. “Monetary policy isn’t switched on and off like that.” The RBA continues to expand its balance sheet through its quantitative easing program. It will soon own 40% of government debt on issue and 20% of state-government debt.

Still, if the economy weakens alarmingly, the RBA has scope to increase bond buying in that scenario, Mr. Harper said.

The economy would have to deteriorate a long way from where it currently is before redoubling stimulus efforts is considered, he added.

The Wall Street Journal