RBA: Economic downturn not as severe as previously thought

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on May 28, 2020
RBA: Economic downturn not as severe as previously thought

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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.

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    Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *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. Rates correct as of August 20, 2022. 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. 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. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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    Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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