‘Biggest contraction since 1930s’ looms
Reserve Bank of Australia governor Philip Lowe has given a grim prediction for the coming months, warning of "difficult days ahead".
Dr Lowe fronted the media this afternoon to provide an update on the Reserve Bank's economic outlook and the implementation of the RBA's coronavirus policy package announced a month ago.
But he said while it was clear we will face "some difficult days ahead" due to social distancing restrictions and general uncertainty, the economy would recover once the virus was contained.
"In terms of the immediate outlook, the next few months are going to be very difficult ones for the Australian economy," he said.
"So the result of both the restrictions and this uncertainty is that over the first half of 2020, we are likely to experience the biggest contraction in national output and national income that we have witnessed since the 1930s."
He said it was difficult to predict the magnitude of that contraction, but that the RBA expected national output to fall by around 10 per cent over the first half of 2020 with most of this decline occurring in the June quarter.
"The unemployment rate is likely to be around 10 per cent by June, although I'm hopeful that it might be lower than this if businesses are able to retain their employees on lower hours," he said.
"These are all very large numbers and ones that were inconceivable just a month or two ago.
"In terms of inflation, we are also expecting a significant decline in the June quarter. The large fall in oil prices, combined with the introduction of free child care, and the referral or reduction in some price increases means that it is quite likely that year-ended headline inflation will turn negative in the June quarter. If so, this will be a first time since the
early 1960s where the price level has fallen over a full year."
He said the economic data still to come would present a "very sobering picture of the state of our economy" with "many reports of record declines in economic statistics" likely - although he stressed this period would pass.
Key to that economic recovery would be the country's "strong balance sheets" of our governments, private banks and the Reserve Bank itself.
"I think we can be confident that our economy will bounce back and that we will see it recover," he said, noting the timing and pace of the recovery depends upon how long we need to restrict economic activities.
Dr Lowe said one plausible scenario was that restrictions would be progressively relaxed by mid-year with most bar international travel lifted by the end of 2020.
"Under this scenario, we would expect the economy to begin its bounceback in the September quarter and for that bounceback to strengthen from there," he said.
"If this is how things play out, the economy could be expected to grow very strongly next year, with GDP growth of perhaps 6 or 7 per cent after a fall of around 6 per cent this year."
However, he said it was likely the unemployment rate would remain above 6 per cent over the next couple of years, with many firms delaying or cancelling wage increases.
And regardless of the timing of recovery, he said the "twin health and economic emergencies" would "cast a shadow over our economy for some time to come", with some businesses likely to be permanently lost in the months ahead.
"There will also be a higher level of debt in many households - and many households might re-evaluate the risks of having highly leveraged balance sheets," he said.
"We are all learning to work, shop and travel differently at the moment, and some of these changes will probably stay with us for some time, requiring a rethinking of business models."
He also recapped the RBA's policy response to COVID-19 which came with five elements, including a reduction in the cash rate to 25 basis points which is unlikely to increase for some time.
Secondly, the RBA has also introduced a target for the yield on three-year government bonds of 25 basis points and a preparedness to buy government bonds in whatever quantities are needed to achieve that target.
The third element was the introduction of a term funding facility allowing authorised deposit-taking institutions have access to funding from the RBA for three years at 25 basis points, with additional funding available if they increase their lending to businesses.
The fourth element of the package is to use the RBA's daily open-market operations to make sure there is "plentiful liquidity in the Australian financial system", while the fifth was the term funding facility, with around $3 billion of an initial allowance of $90 billion already drawn with around 35 institutions participating so far.
"Our monetary response is keeping funding costs low right across the country, and it is keeping credit available to businesses and households," Dr Lowe said.
"The fiscal response is providing significant support to both jobs and incomes. Businesses are also helping their employees by keeping them on wherever they can, and the banks are supporting their customers with more flexible terms.
"Together, these efforts are helping the Australian economy through a difficult period and they are positioning us well for the recovery."
Originally published as 'Biggest contraction since 1930s' looms