A Deep Contraction OR Recession - RBA's take on Australian Economy

There have been expectations around possibility of a recession- Australia’s first recession since 1991, though market experts believe that the stimulus packages that have been released by the Australian government could largely help avoid a recessionary scenario.

The market participants do foresee an eventual recovery and to expedite the same, the Reserve Bank of Australia is ensuring that the job market remains buoyant and businesses keep afloat via introduction of different initiatives, so that when the health crisis recedes, the country is well placed to recover strongly.

RBA’s Monetary Policy Initiatives on Track

To achieve a favourable outcome, on 19 March 2020, the RBA released a comprehensive package to reduce funding costs and support the easy availability of credit to the Australian economy.

One of the key highlights include reduction of the cash rate target to 0.25 per cent until progress has been observed towards reduction in unemployment in Australia with the confidence that the inflation rate would still remain within the target range of 2–3 per cent. It is worth noting that the Treasury predicts the unemployment rate to rise as high as 10% by June given the length of the shutdowns, operational difficulties and restrictions around working in office premises.

Secondly, the government is targeting to achieve 0.25 per cent yield on the 3-year Australian Government bonds via purchases of Government bonds and semi-government securities across the yield curve in the secondary market that would facilitate to reach the target as well as help in addressing market dislocations.

Furthermore, the RBA also announced inception of a 3-year term funding facility (which would be worth minimum $ 90 billion), especially to increase lending and support the provision of credit to small and medium-sized businesses.

It is very evident that the RBA is working closely with other financial regulators and the government to ensure liquidity to financial markets and households, depicting that the Australian financial system is resilient and well placed to deal with the impacts of Covid-19 pandemic. The Reserve Bank has also highlighted that the whole banking system is well-capitalised and is in a strong liquidity position with big financial buffers available in case of contingencies.

Where is Economy Heading? – Philip Lowe’s Speech

In a recent public release, the Reserve Bank Governor Philip Lowe captured the fact that Australia has had a long record of responsible fiscal policy and the increasing fiscal debt should not be a matter of concern amidst the unprecedented situation caused by the novel coronavirus and the priority remains effectiveness of the measures being implemented to contain and combat the Covid-19 menace.

In the past few weeks, the RBA has bought $ 40 billion of government bonds and provided around $ 100 billion in lending to the banking system. The Reserve Bank Governor Philip Lowe has also stated in his tenure as a governor, he could not have predicted such a scenario caused by the Covid-19 and the aggressive measures being executed to address the situation.

At the same time, he has also emphasised that he favours the extension of lockdowns if the need arises to do so as these concerted efforts are yielding positive results, with the number of Covid-19 cases witnessing a drop around the world due to stringent social distancing restrictions.

As per the recent figures released by the Australian Bureau of Statistics (ABS), there has been a loss of 800,000 jobs in Australia and a 6.7% reduction in take home pay. Without the doubt, the RBA is of the view that Australia could be witnessing one of the most severe economic contractions since the Great Depression, accompanies by the rest of the world. The Reserve Bank is also estimating a decline of 10% in the Gross Domestic Product (GDP) for the first half of calendar year 2020, although the economy is expected to grow relatively strongly next year.

The hardest hit industries include food services, accommodation, arts and hospitality while more jobs remain stable in the technology, telecommunications and healthcare sectors particularly.

Phillip Lowe has also suggested that even if the restrictions last for until the mid-2020 and the economy begins to head in an upward direction, the GDP is expected to grow by 6-7 per cent in 2021, after having shrunk through 2020.

Good Read: Is it an inflection point for the COVID-19 pandemic?

The major game changer in Australia has been roll out of the Australian government’s Jobkeeper program, a wage subsidy to keep the citizens working, where a minimum payment of $1,500 per fortnight would be given to the eligible employees. Different companies have been working to apply for many of the stimulus packages been introduced by the government to benefit their employees.

Amid the Covid-19 outbreak, the Australian dollar has been sliding which could definitely imply a hike in the price of imported goods at a time when the demand is also at a low as people struggle to keep their businesses afloat and jobs going. Although, the Australian dollar has recorded much recovery since March 2020.

Overall, Australia is well on track with its policy responses to deal with the ongoing disruptions head on. Despite the optimism that Australian economy would bounce back quickly when things get to normal, its hard to predict the timing of the resolution of current circumstances.