Outlook: Benjamin Ong

Economic forecasts range from dim to grim, so we can’t afford to let our guard down

Reserve Bank of Australia (RBA) governor Philip Lowe’s statement – released after the Australian central bank’s May 5 board meeting (where it kept monetary policy settings unchanged, including the targets for the cash rate and the yield on three-year Australian government bonds of 0.25%) – puts into black and white the collective and individual thoughts of all (not most) central bankers and governments on the planet.

“A stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity,” says Lowe.

On the other hand, if the lifting of restrictions is delayed or the restrictions need to be reimposed, or household and business confidence remain low, the outcomes would be even more challenging than those in the baseline scenario, says Lowe.

So it all depends on the success or failure in containing/finding a cure/preventing a second wave of Covid-19.

It had better come soon. For even the RBA’s best guess (baseline) scenario is not looking good.

“Output falls by around 10% over the first half of 2020 and by around 6% over the year as a whole. This is followed by a bounceback of 6% next year. The unemployment rate peaks at around 10% over coming months and is still above 7% at the end of next year,” the bank says, before returning to 5% by mid-2022.

In the March quarter, CPI inflation rose to 2.2%, but it is expected to turn negative temporarily in the June quarter, due to falls in oil prices, the introduction of free child care and deferrals of various price increases.

“Further out, in the baseline scenario inflation is 1%-1.5% in 2021 and gradually picks up further from there,” says the RBA.

The drop in the Commonwealth Bank Composite PMI for Australia (that was released on the same day as the RBA’s board meeting) to a record low of 21.7 in April from 39.4 in the previous month – as both manufacturing (down to 45.6) and services (down to 19.5) contracted at their fastest pace on record – gives credence to the RBA’s gloomy outlook on Australian economic growth.

The Commonwealth Bank PMI survey is “designed to provide a timely indication of changes in business activity in the Australian private sector economy as a whole”. Readings above 50 signal an improvement in business activity on the previous month, while readings below 50 show deterioration.

The lead from the ANZ job ads series – released a day before the RBA meeting – also supports the Australian central bank’s dim view of the labour market. Job ads in newspapers and on the web plummeted by 53.1% over April and by 62.2% from a year earlier.

Australia’s labour market outlook would have been worse – with the unemployment rate earlier predicted to reach as high as 18% – had it not been for the federal government’s $130 billion JobKeeper scheme payments that limited the issuance of pink slips.

So much so that the Westpac-Melbourne Institute Unemployment Expectations Index dropped by 13.4% in May – indicating workers are more confident about their job security – after surging by 17.4% in April. Not only this, overall consumer sentiment jumped to its biggest monthly gain on record in May following Australia’s success in “flattening the curve” and justifying the federal government’s gradual easing of social isolation and lockdown restrictions.

Still, Australia cannot afford to let its guard down. Not when the threat of a second wave of infection remains clear and present. Easing social restrictions and lockdowns early would no doubt support a speedier return to normal and faster economic recovery but this comes at the risk of inviting a second wave – necessitating re-enforced restrictions that’ll prolong abnormal business activity.

China, South Korea and Germany – countries that have earlier eased social restrictions – are reportedly experiencing a second wave of infections, prompting their respective governments to re-impose restrictions. “I think we are going in the right direction … But the right direction does not mean we have by any means total control of this outbreak,” says Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases.