GDP likely subdued through September: RBA

The Reserve Bank expects the Australian economy to fall sharply in the June quarter and remain subdued through to September as coronavirus shutdowns increase pressure on households and businesses.

Minutes from the RBA’s monthly meeting on April 7 showed board members agreed income support measures such as the federal government’s JobKeeper program would help cushion the COVID-19 blow for households, although business conditions and investment was deteriorating. 

Governor Philip Lowe is expected to elaborate on the economic challenges facing the nation when he addresses media later on Tuesday

The Reserve Bank this month opted not to change the rate after two coronavirus-inspired cuts in March reduced the figure to a record low 0.25 per cent – where it is expected to remain for some time. 

The bank also reaffirmed a 25 basis-point yield target on three-year Australian government bonds after it introduced quantitative easing measures at a March 18 emergency meeting.

The board this month said the JobKeeper subsidy and other federal stimulus measures were expected to increase the number of people remaining employed, but household incomes were expected to be much lower.

Members agreed evidence hinted that GDP could fall significantly in the June quarter and remain subdued in the September quarter. 

A “very sharp decline” in hours worked was expected, associated with significant increases in both the unemployment rate and the number of people working reduced hours. 

“Real estate, hospitality and tourism, along with many parts of retail, essentially would not operate while the current restrictions remain in place, while some industries, including health care, utilities and mining, would be less affected,” minutes from the April 7 meeting said. 

Deferrals and cancellations of business investment plans were a theme in the central bank’s discussions with liaison contacts, while it said recent survey indicators of business conditions had fallen sharply. 

Members said discussions also highlighted that weaker demand conditions, including for short-term rental accommodation, were expected to extend the weakness in residential construction.

RBA members also noted that liaison with retailers had highlighted a much larger shift in household spending patterns through March as social distancing measures were put in place. 

JP Morgan’s Sally Auld said the surprise for some market participants was the RBA’s explicit acknowledgement that bond purchases would be tapered, conditions permitting. 

“… The key quote being: “Members noted that, if conditions continued to improve, it was likely that smaller and less frequent purchases of government bonds would be required”,” Ms Auld said in a note. 

“So far we have had smaller purchases (this week daily purchases have been $0.5bn); the next step will be to have less frequent purchases (purchases currently take place four days per week).” 

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