Reserve Bank chief Philip Lowe said Australia’s economy is likely to suffer its biggest contraction since the 1930s, while holding out the prospect of a sharp rebound on the other side of the coronavirus lockdown.
“National output is likely to fall by around 10% over the first half of 2020, with most of this decline taking place in the June quarter,” the governor said in a speech Tuesday in Sydney. “The unemployment rate is likely to be around 10% by June, although I am hopeful that it might be lower than this if businesses are able to retain their employees on lower hours.”
Australia is spiraling toward its first recession since 1991 as large tracts of the service sector are shuttered to stem the outbreak. The RBA and government have assembled a massive fiscal-monetary injection worth 16.4% of gross domestic product to aid households and firms.
Asked about the labor market in a question-and-answer session after the speech, the governor said the RBA’s main focus right now is total hours worked, which are expected to fall by 20% this quarter.
Lowe explained policy makers’ reticence to call the downturn a “recession,” saying an economic contraction more accurately described the once-in-a-century event, which bore little relationship to the regular business cycle.
Lowe said it was plausible that various restrictions could be scaled back beginning around the middle of the year, and could be mostly removed by late in 2020.
“Under this scenario we could expect the economy to begin its bounce-back in the September quarter, and for that bounce-back to strengthen from there,” Lowe 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%–7%, after a fall of around 6%.”
At an emergency meeting in mid-March, the RBA cut the cash rate to its effective lower bound of 0.25%, announced a bond-buying program and a A$90 billion ($57 billion) lending facility to get credit flowing into the economy. Since then it has bought more than A$45 billion of government bonds to lower rates across the economy.
The central bank gradually has scaled back its daily operations, with benchmark three-year bond yields broadly in line with the 0.25% target and as liquidity has improved. The governor said longer-dated purchases would be scaled back moving forward.
“With conditions more settled at the moment, our plan for the immediate future is to schedule any bond auctions we conduct for three days each week — Mondays, Wednesdays and Thursdays,” Lowe said. That doesn’t mean the bank will buy bonds on all those days, he said.
Semi-government securities will be purchased on a weekly basis, Lowe said.
Australian economic data released to date mostly has covered the period before the lockdown or during its early stages. Key indicators showing the full force of the restrictions have been business and consumer confidence, which both slumped by the most on record. Job advertisements and services were also hit badly.
Bloomberg Economics estimates the economy is poised for its deepest recession in 90 years, with GDP set to fall about 10% in the first three quarters of the year.
Asked whether the economy would need further support once the pandemic abates, Lowe said that a cash rate near zero, together with the fiscal measures enacted, should be enough to get the economy going. Interest rates will remain low for a very long time, he said.