Delta puts brakes on recovery

Vaccinations key to bounce

THE Australian sharemarket recovered from an early tumble on Tuesday after Reserve Bank Governor Philip Lowe delivered a relatively upbeat assessment of the Australian economy.

The benchmark ASX 200 dropped at the open but turned a corner after Dr Lowe’s lunchtime address to register a third straight gain, adding 12.1 points or 0.2 per cent to close at 7437.3 points.

Dr Lowe, in his annual address to the Anika Foundation, said the economy will “contract significantly” over the three months to September, and “it would not be surprising to see (unemployment) in the high fives for a short period of time”, versus the most recent reading of 4.6 per cent in July.

More positively, Dr Lowe said vaccinations provide “a clear path out of the current difficulties” and that the nation “will return to a stronger economy next year”. Dr Lowe in his speech was unusually blunt in hosing down market expectations that rates would rise to 0.25 per cent by the end of 2022, and to above 1 per cent by the end of 2024.

“These expectations are difficult to reconcile with the picture I just outlined and I find it difficult to understand why rate rises are being priced in next year or early 2023,” Dr Lowe said.

“While policy rates might be increased in other countries over this time frame, our wage and inflation experience is quite different.”

Openmarkets Group chief executive Ivan Tchurilov said Dr Lowe had effectively issued a “direct challenge” to those banks and economists touting an interest rate rise as early as November next year.

Dr Lowe said the exact magnitude of the economic contraction in the September quarter was likely to be at least 2 per cent and “possibly significantly larger”.

“This is a major setback, but it is likely to be only temporary,” he said. “We expect the economy to be growing again in the December quarter, with the recovery continuing into 2022.

“Delta is delaying progress, but it is not expected to derail our resilient economy,” Dr Lowe said.

While larger firms are managing the Delta disruptions relatively well, the central bank boss underlined how “many small and mediumsized businesses are facing very difficult conditions”.

“Many are in ‘wait, survive and see’ mode, having experienced a large drop in revenue,” he said. “Government assistance is helping, but the longer they have to wait before reopening, the more difficult things will become and the greater the potential damage to this important part of the economy. For some businesses, there is a limit to how long they can wait.”

Dr Lowe conceded that the reality of having to live with some level of Covid could make for a slower recovery as restrictions eased.