RBA: Unemployment rate to peak below 8%, GDP to increase by 5% in 2021

author-avatar By on November 06, 2020
RBA: Unemployment rate to peak below 8%, GDP to increase by 5% in 2021

Photo by ôc. on Unsplash

Australia's central bank has forecast a drastically improved outlook for the economy.

The Reserve Bank (RBA) said in its November Statement on Monetary Policy deterioration in the economy had been less severe than expected, helped by early success in bringing infection rates down. 

The RBA said the unemployment rate was likely to increase in the short term due to tightened JobSeeker requirements, but would peak far lower than the previously forecasted 10%. 

"The unemployment rate is expected to peak a little below 8% around the end of the year," it said.

"This peak represents a very high level of spare capacity in the labour market.

"The unemployment rate is expected to decline only gradually, to just above 6% by the end of 2022." 

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.

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%. 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.

The central bank said policy support and a reopened Victoria would enable a quicker recovery in the national economy. 

"After contracting by 4% over 2020 as a whole, GDP is expected to increase by around 5% over 2021 and 4% over 2022."

"This would bring GDP back to its end-2019 level by the end of 2021, but leave it well short of the path expected prior to the outbreak of the pandemic.

"The recovery can be expected to be bumpy and uneven, and highly sensitive to further virus outbreaks." 

These scenarios are based on no further large outbreaks of COVID-19, with no new major economic restrictions imposed. 

If there was to be a third wave and borders remained closed, the forecast for unemployment was significantly worse. 

"Unemployment would increase more and stay high under this scenario," it said.

"After peaking at around 9%, the unemployment rate would still be around 8.5% by the end of 2022." 

However, the RBA said additional progress in the control and treatment of the virus this year would significantly improve the labour market. 

"Better health outcomes and ongoing control over the virus would boost confidence and help sustain a swifter recovery in household consumption and business investment.

"This would see the unemployment rate decline faster, reaching around 5.5% by the end of next year." 

House price outlook uncertain 

The RBA said although the house price crash many economists had predicted didn't eventuate, a spike in mortgage defaults could weaken the market. 

"Although the national decline in housing prices has been limited to date, it is possible that conditions could weaken if there is a sharp increase in households that are unable to meet their mortgage obligations.

"This could be the result of a higher incidence of business failures and a further large rise in unemployment.

"Further out, the slowing in population growth could weigh on housing demand by more than is expected, resulting in lower prices and weaker dwelling investment." 

But in the event of further government support, like an extension of the HomeBuilder scheme, prices could increase. 

"In the other direction, substantial policy stimulus could lead to a sharper recovery in housing prices supporting a stronger outlook for private demand than currently forecast."

Cash rate to be unchanged for three years 

The RBA cut the cash rate in November to a new record low of 0.10% on Tuesday, while also expanding its quantitative easing program by $100 billion. 

It noted the Board was not contemplating a further reduction in interest rates. 

"With the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero, interest rates have been lowered as far as it makes sense to do so in the current environment.

"The Board considers that there is little to be gained from short-term interest rates moving into negative territory and continues to view a negative policy rate as extraordinarily unlikely." 

The central bank said it doesn't expect to hike rates for at least three years, with progress towards its goals some time away. 

"The Board has committed not to increase the cash rate target until actual inflation is sustainably within the target range of 2–3%."

"This will require a period of strong employment growth and a return to a tight labour market."


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 2020. 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.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

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.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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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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