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Reserve Bank governor Philip Lowe: Coronavirus and Bushfires are short-term economic speedbumps

The Reserve Bank governor has painted a bright picture of the Australian economy in 2020, although one that will be clouded by the uncertain costs of bushfires and coronavirus early this year.

Having noted the possibility of a "gentle turning point" in the economy in the second half of 2019, RBA governor Philip Lowe has become more confident of that shift, both internationally and domestically.

"With the progress on the trade and Brexit issues, there have been some signs that the downswing in manufacturing activity and international trade is coming to an end," he told a National Press Club luncheon in Sydney.

"Our central forecast is for the Australian economy to expand by 2.75 per cent over 2020 and 3 per cent the following year.

"These growth rates are a little above our current estimate of medium-term growth in Australia, so some inroad into spare capacity should be made."

In layman's terms, that means the Reserve Bank thinks unemployment will edge lower and wages should edge higher, as should the increase in consumer prices that forms the key part of its monetary policy target.

Mr Lowe said there were several areas that give the Reserve Bank confidence that growth would improve this year, compared to last year's lacklustre GDP growth, which was running at an annual rate of 1.7 per cent as of the last reading for the September quarter.

"The outlook is also being supported by ongoing high levels of investment in infrastructure and the likelihood that the downswing in residential construction will come to an end later this year. Further increases in resource exports and continuing solid growth in public demand will also help," he noted.

Economic clouds are likely to clear quickly, says Lowe

However, Mr Lowe also acknowledged continued drags on the economy from the drought, which is expected to take another 0.25 percentage points off GDP this year, and cautious consumers who are focused on paying down debt.

"Faced with the reality of slow growth in wages and falling housing prices, many households scaled back their spending to put their finances and their balance sheets on a sounder footing and the effects have been felt across the economy," Mr Lowe observed.

However, while interest rate cuts have not yet reversed this trend by persuading most Australians to borrow and spend more, Mr Lowe said they were helping households pay down their record mortgage debts faster.

"They are also bringing forward the day when households feel comfortable to lift their spending again," he added.

There is another threat to the economy from the damage and disruption wrought by Australia's bushfires and the economic shutdown in China due to the coronavirus.

However, Mr Lowe said these setbacks were likely to be merely temporary.

"Our assessment is that GDP growth for 2020 as a whole will be largely unaffected," he said.

"There is, however, likely to be a noticeable effect across the December quarter last year and the current quarter.

"While it is still difficult to be precise, we estimate that the effects of the bushfires will reduce GDP growth by around 0.2 percentage points across the two quarters."

Mr Lowe reiterated that, if the negatives did outweigh the positives and unemployment started to rise, the Reserve Bank board would be prepared to cut interest rates even further.

"If the unemployment rate were to be trending in the wrong direction and there was no further progress being made towards the inflation target, the balance of arguments would change," he said.

"In those circumstances, the board would see a stronger case for further monetary easing."



Source: ABC News

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