Reserve Bank governor Philip Lowe believes the economic recovery in Australia is likely to be “bumpy and uneven”, with the coronavirus outbreak in Victoria having a major effect on that state’s economy.
His warning came after the Reserve Bank kept the cash rate at a record low 0.25 per cent following its monthly board meeting.
“The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s,” Dr Lowe said in his post-meeting statement.
But he maintained the downturn was not as severe as initially expected and a recovery was now underway in most of Australia.
“This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy,” Dr Lowe said.
He said the board discussed a number of scenarios about the outlook, which will be detailed in Friday’s quarterly statement on monetary policy. That will also contain the central bank’s latest economic forecasts.
Under its baseline case, economic output falls by six per cent over 2020 and then grows by five per cent over 2021.
This would see the unemployment rate rise to about 10 per cent by late 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs.
But then the rate would decline to around seven per cent over the next couple of years.
BIS Oxford Economics chief economist Sarah Hunter said this appears to be materially weaker than the Treasury’s latest projections.
Victorian Premier Daniel Andrews has warned a quarter of a million workers in his state could lose their job as a result of an extended and deeper lockdown in a further attempt to stop the spread of the coronavirus.
The Reserve Bank’s decision came as retail spending posted its worst quarterly result since the introduction of the GST 20 years ago and the risks are it could worsen as Victoria locks down in its fight against the coronavirus.
Among Victoria’s latest pandemic restrictions the retail sector – outside of supermarkets, grocery stores and bottle shops – will have to close doors and shift to online shopping only.
“Melbourne’s stage four lockdown will put a significant drag on total retail turnover in the near term,” Dr Hunter said.
Australian Bureau of Statistics data shows retail spending dropped 3.4 per cent in the June quarter following a 0.7 per cent rise in the previous three months.
Unsurprisingly, Australians continue to feel anxious as the COVID-19 pandemic sinks the economic outlook.
The latest ANZ-Roy Morgan weekly consumer confidence index – a pointer to future retail spending – fell for a sixth straight week.
It declined 0.4 per cent, to be at its lowest level since late April.
ANZ head of Australian economics David Plank warned the latest survey for last week did not capture the impact of the extended Melbourne lockdown announced at the weekend.
In more positive news, international trade saw a larger surplus of $8.2 billion in June compared with $7.3 billion in the previous month, aided by iron ore exports.
Trade Minister Simon Birmingham said the COVID-19 pandemic was testing all Australian producers and businesses but trade data highlighted the “incredible strength and resilience” of the export sector.
AMP Capital chief economist Shane Oliver calculates exports will have added about one percentage point to economic growth in the June quarter.