RBA: Economic downturn not as severe as previously thought

author-avatar By on May 28, 2020
RBA: Economic downturn not as severe as previously thought

Photo by Thomas de LUZE on Unsplash

Australia's central bank has given an optimistic, if not cautious outlook on the economy.

Reserve Bank (RBA) Governor Phillip Lowe fronted the Senate Select Committee on COVID-19 on Thursday, fielding questions from senators on how the economy was faring in the COVID-19 era. 

Dr Lowe said the Government's stimulus packages, coupled with the RBA's bond buying, meant the economy was tracking slightly better than the baseline scenario outlined in the latest statement on monetary policy. 

"The shape and timing of that recovery depends not only on when restrictions are lifted, but also on the confidence that Australians have about their own health and their finances," Dr Lowe said.

"With the national health outcomes better than earlier feared, it is possible that the economic downturn will not be as severe as earlier thought.

"Much depends on how quickly confidence can be restored."

The baseline scenario predicted most social distancing restrictions to be lifted by the end of the September quarter, and activity and employment to recover in the second half of the year.

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

Provider
Ad rate
p.a.
Comp rate*
p.a.
Monthly
repayments
 
2.74% 2.74% $1,631 Go to site
LibeRate OO P&I 80% LVR
2.54% 2.46% $1,588 Go to site
Variable P&I 90% OO
2.39% 2.40% $1,558 Go to site
Home Value Loan OO P&I Promo
2.59% 2.60% $1,599 Go to site

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 01 September 2020. View disclaimer.

But Dr Lowe said even as the recovery got under way, the shadow cast by the pandemic would be felt for some time. 

"As a country, we will need to turn our minds as to how to move out of this shadow," he said. 

"A reform agenda that makes Australia a great place for businesses to expand, invest, innovate and hire people would certainly help." 

Dr Lowe gave further assurance negative rates were out of the question, as they would prevent banks from lending.

"I think negative interest rates are extraordinarily unlikely."

"I don't think negative interest rates work. The package we have so far is working . If we had to do more we could buy more government bonds."

Optimism on hours worked 

The RBA has long stated its desire to see the unemployment rate at 4.5%, which it deemed as full employment.

However, Dr Lowe said the central bank has pushed the full employment tag to 5%. 

"We know from previous sharp economic downturns there will be scarring in the labour market," he said. 

"We want to reduce the amount of scarring. I think the estimate of full employment starts rising again to 5%."

Dr Lowe said the key metric it was using to evaluate employment, hours worked, had a much improved outlook. 

Previously the RBA had predicted hours worked would fall by 20%, but had reevaluated this to 15%. 

The Australian Bureau of Statistics found hours worked declined 9.2% in April. 

Stimulus measures are vital for recovery 

There has been speculation JobKeeper and JobSeeker could be ended sooner than their scheduled 27 September date, with Scott Morrison refusing to rule it out. 

Dr Lowe said the fiscal stimulus was vital for economic recovery and ending it early would be a mistake.

"I think it's very important that we don't withdraw the fiscal stimulus too early," Dr Lowe said.

"Ending the fiscal support could be damaging, but if the economy bounces back then tailoring the fiscal support might be the right thing to do."

However, the central bank Governor added the RBA hadn't incorporated the schemes into its forecasts but said that a review of both schemes was necessary for their success. 

"We didn't make assumptions about the number of people on JobKeeper or JobSeeker."

"There will be a three month review of the program and I think it was very sensible of the government to build that into the program."

The Labor Opposition, among others, have slammed the Government for their $60 billion miscalculation of how much the JobKeeper program would cost.

But Dr Lowe said the new figure was good news for the economy. 

"The economy is doing a bit better than was earlier feared. People were talking about a six month hibernation. But businesses are opening up now," he said.

"It's really good news that that amount of money [for JobKeeper] doesn't have to be spent.

"Right now I don't think they do need to spend more [on JobKeeper] but the issue will be in three to four months time."


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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Alex joined Savings.com.au in 2019. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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