Improving economic signs pre-Vic lockdown

The pace of contraction in Australia’s services sector and business more broadly slowed in July, but that was before Victoria went into its harsher lockdown to battle the coronavirus.

The Australian Industry Group’s Australian performance of services index rose 12.5 points in July.

But at an index of 44.0 points it remains below the 50-point mark that separate contraction from expansion.

This slower contraction follows three months of exceptionally low results, including a record low in April.

Similarly, its business index rose 11.1 points to 44.7 point.

Ai Group chief executive Innes Willox said these were further evidence that the national economy was stabilising before the Victorian shutdown.

“The extraordinary Victorian lockdown and reactions by other states and territories in the light of the outbreak of COVID-19 infections will weigh heavily against any optimism interpretations of the improvement,” he said releasing the data on Friday.

The Reserve Bank will release its quarterly statement on monetary policy on later Friday, which will contain its latest economic forecasts.

Reserve Bank governor Philip Lowe admits trying to forecast the economic outlook is difficult in the face of a pandemic and Victoria’s tougher coronavirus restrictions have no doubt made it even more complex.

Finance Minister Mathias Cormann said that was why the government shifted the handing down of the federal budget to October from its traditional May release.

“It was nigh impossible to provide credible forecasts in a rapidly involving situation,” Senator Cormann told Sky news.

“Clearly the situation in Victoria is … having a very bad impact on the economy nationally.”

Dr Lowe gave a flavour of what to expect from its forecasts in his post-board meeting statement on Tuesday after leaving the cash rate at a record-low 0.25 per cent.

The central bank’s baseline case is that growth will drop six per cent this year as the economy suffers its first recession in nearly 30 years before rebounding by five per cent in 2021.

This will see unemployment rise to about 10 per cent by year-end as a result of the Victorian lockdown causing further job losses and more people elsewhere in Australia seeking work.

In the next couple of years, the unemployment rate is expected to decline gradually to about seven per cent.

The Australian Treasury also revised up it jobless forecast on Thursday to about 10 per cent, having previously predicted a peak of 9.25 per cent, an outlook Prime Minister Scott Morrison said was a “heavy blow”.

The jobless rate was already 7.4 per cent in June and up from 5.1 per cent when COVID-19 first struck Australian shores. 

The central bank board discussed a number of other scenarios for the outlook, which will be detailed in the policy statement.

Reserve Bank assistant governor for economics Luci Ellis will also deliver a webinar address to Australian Business Economists shortly after the policy statement is released on Friday.

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