RBA is hostage to lockdowns

The Reserve Bank is not ready to make a call on the likelihood of a double dip recession. Picture: NCA NewsWire/Joel Carrett

The Reserve Bank board has confirmed it is too early to predict with any certainty what the Delta variant of the Covid-19 virus and current lockdowns in Sydney and Brisbane will mean for the nation’s future economic health. Adopting a wait-and-see approach, the RBA on Tuesday maintained the cash rate at a historic low of 10 basis points and signalled it still intended to start easing liquidity by tapering its bond-buying program from early next month. Like the government, the RBA is hoping the experience of a strong bounce back from lockdowns last year will be repeated. But there is every reason to be cautious.

The RBA’s message is that the economic outlook for the coming months is uncertain and depends on the evolution of the health situation and the containment measures. The bank concedes much will depend on the success of vaccination programs to ensure the nation can get itself out of the stop-start cycle of lockdowns. This is doubly so given the federal government’s position now is that short, sharp lockdowns will be the preferred model to combat spread of the Covid-19 virus.

The RBA says the recent outbreaks are interrupting the national economic recovery and gross domestic product is expected to decline in the September quarter. But it is not ready to make a call on the likelihood of a double-dip recession, which would require another contraction into negative growth in the December quarter. The bank board says the Australian economy had considerable momentum before the current lockdowns and it still is expected to grow strongly again next year. This will be aided by significant additional policy support from government and the vaccination program. Treasury has modelled the economic impact of lockdowns and found that costs fall dramatically as the rates of vaccination increase. The bad news is that until high rates of vaccination are achieved, the potential for lockdowns is now greater.

The reality is the cost of the latest lockdowns in Sydney and Brisbane is starting to bite. Business Council of Australia chief executive Jennifer Westacott said the decision by Qantas to furlough 2500 staff was a “real wake-up call that this is really hurting”. Ms Westacott praised the government’s assistance measures but said: “Until we get these stop-start lockdowns to end, we’re going to see more and more businesses put under pressure.”

These concerns have yet to flow fully into the RBA’s thinking. The bank’s central scenario is for the economy to grow by a little more than 4 per cent across next year and by around 2.5 per cent across 2023. This scenario is based on a significant share of the population being vaccinated by the end of this year and a gradual opening up of the international border from the middle of next year.

Qantas staff, and the rest of the nation, have a lot riding on this being the case.