Aus­tralia cen­tral bank sees bumpy road to re­cov­ery

This comes on virus shut­ting down Vic­to­ria

The Star Malaysia - StarBiz - - Foreign News -

SYD­NEY: Aus­tralia’s cen­tral bank held its cash rate at an all-time low yes­ter­day, pre­dict­ing the eco­nomic re­cov­ery will likely be both “un­even” and “bumpy”, as the coun­try’s sec­ond-big­gest state locks down to fight a resur­gence of the coro­n­avirus.

In an omi­nous sign that un­der­scored pol­i­cy­mak­ers’ cau­tious stance, data out ear­lier showed re­tail sales vol­umes suf­fered their big­gest plunge in two decades in the sec­ond quar­ter and an­a­lysts warned spend­ing will re­main de­pressed for some time yet.

On Tues­day, the Re­serve Bank of Aus­tralia (RBA) said its emer­gency stim­u­lus was “work­ing as ex­pected” while leav­ing its cash rate at 0.25% in a widely ex­pected de­ci­sion.

The RBA, how­ever, painted a gloomy pic­ture for the com­ing months, pre­dict­ing the job­less rate would spike to 10% later this year due to fur­ther job losses in Vic­to­ria, which is strug­gling to con­tain a sec­ond wave of in­fec­tions.

Un­em­ploy­ment is seen stay­ing el­e­vated around cur­rent lev­els of 7% over the next cou­ple of years.

Given the spare ca­pac­ity, the RBA ex­pects in­fla­tion to con­tinue to un­der­shoot its 2% to 3% medium-term target over the next two years.

The cen­tral bank will re­lease its de­tailed quar­terly out­look on Fri­day.

“The Aus­tralian econ­omy is go­ing through a very dif­fi­cult pe­riod and is ex­pe­ri­enc­ing the big­gest con­trac­tion since the 1930s,” RBA gov­er­nor Philip Lowe said in a post-meet­ing state­ment.

“As dif­fi­cult as this is, the down­turn is not as se­vere as ear­lier ex­pected and a re­cov­ery is now un­der­way in most of Aus­tralia,” Lowe added.

“This re­cov­ery is, how­ever, likely to be both un­even and bumpy with the coro­n­avirus out­break in Vic­to­ria hav­ing a ma­jor ef­fect on the Vic­to­rian econ­omy.”

Vic­to­ria de­clared a “state of dis­as­ter” this week fol­low­ing a re­lent­less surge in coro­n­avirus in­fec­tions since late June.

The RBA forecast a 6% drop in gross do­mes­tic prod­uct over 2020, and then ex­pects 5% growth over the fol­low­ing year.

Con­sumer spend­ing is prov­ing to be one of the big­gest drags on the econ­omy, with the larger-than-ex­pected 3.4% drop in sec­ond quar­ter re­tail vol­umes seen sub­tract­ing a hefty 0.6 per­cent­age points from growth in that pe­riod.

In con­trast to re­tail­ers, Aus­tralia’s ex­porters have been go­ing gang­busters thanks to de­mand from China for iron ore and other re­sources, while im­ports have been ham­mered by the lock­downs.

Sep­a­rate data showed the trade sur­plus swelled to A$8.2bil in June, taking the to­tal for the sec­ond quar­ter to a whop­ping A$23.4bil.

Still, econ­o­mists warned the out­look was fur­ther clouded by the coro­n­avirus woes in Vic­to­ria, with weekly spend­ing data by the coun­try’s ma­jor banks al­ready show­ing signs of mod­er­a­tion.

“Vic­to­ria’s re­turn to hard lock-down changes ev­ery­thing...(and) presents a sig­nif­i­cant risk of Vic­to­ria drag­ging down growth in na­tional ac­tiv­ity data in the last two months of Q3,” said Citi econ­o­mist Josh Wil­liamson.

“We could also see neg­a­tive con­fi­dence im­pacts drag on data in other states, par­tic­u­larly as other states have used the rise in Vic­to­rian Covid-19 cases to de­fer open­ing their bor­ders or sought to tighten access to some states.”

Hard times: A pedestrian wear­ing a face mask walks past the Re­serve Bank of Aus­tralia build­ing. The bank has painted a gloomy pic­ture for the com­ing months, pre­dict­ing the job­less rate would spike to 10% later this year. — Bloomberg

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