Australia’s central bank presents a grim scenario

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SYDNEY – Australia’s central bank has said the country’s unemployment rate could stay near its peak throughout next year if Australia is rocked by a series of regional coronavirus outbreaks and continued lockdowns to slow the spread of the pathogen.
The so-called downside scenario was detailed in the Reserve Bank of Australia’s quarterly monetary policy statement released on Friday. It was included alongside a discussion of the economic impact of a faster-than-expected recovery and the central bank’s baseline projection that output is expected to fall 6% this year, with the unemployment rate climbing to around 10% at the end of the year.

So far, the RBA considers its program to support the Australian economy to be working as expected and that the recession is not as severe as it had anticipated.
Still, the RBA has said the economic outlook is very uncertain and that it needs to consider all possible outcomes.

The RBA’s baseline scenario assumes authorities in Victoria are under control of the latest virus outbreak and other states or territories are not aggressively tightening restrictions. International travel would remain on hiatus until the middle of next year.
That would pave the way for economic growth to rebound to around 5% in 2021, with the unemployment rate falling from a high of around 10% this year to 7% over time. Core inflation would likely stay below 2% for the next two years, the RBA said.
Nonetheless, in a downside scenario, the RBA said a recovery in services exports would be delayed and consumer spending would fall further until December, despite continued stimulus and income support measures.
“Business investment would also decline sharply,” the RBA said of this pessimistic view. “Domestic activity would take much longer to pick up in this scenario, which would keep the unemployment rate near its peak throughout 2021.”
On Tuesday, the RBA left its policy parameters unchanged as it went through the country’s worst economic contraction since the 1930s, while stepping up its yield curve control strategy by signaling that it would buy more bonds. Core inflation is expected to stay below the central bank’s 2% -3% target range for a long time, locking in historically low interest rates for many years.
Much depends on the measures the government is prepared to introduce to cushion the economic impact of the Victorian epidemic and support jobs elsewhere. Treasurer Josh Frydenberg wants to withdraw some of the budget support put in place at the start of the pandemic, but economists warn of an impending fiscal cliff if that support is canceled too quickly while the economy is in a fragile state.
Write to David Winning at [email protected]

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