RBA Newsflash – May 2020


Updated May 5th 2020

Frank Schiraldi

RBA keeps rates on hold but outlook for the economy is bleak

The Reserve Bank left its official interest rate unchanged at 0.25 per cent today. The RBA will almost certainly keep the cash rate at the current level, which is the lowest point it can go, for at least a couple of years. 

The RBA will also keep its bond-buying program, announced in March as part of a package of policy measures, in place for an extended period. The bond purchases are aimed at keeping long-term interest rates low, which will influence the interest rates paid by households and businesses. 

The RBA stated that it “will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”.

The RBA’s unprecedented actions over the past two months are due to a bleak economic outlook. The RBA is releasing forecasts on Friday that are likely to predict the largest economic downturn since the Great Depression, with the unemployment rate forecast to be around 10 per cent in the coming months. A massive decline in migration will be a key driver of the recession. 

The end of shutdowns doesn’t mean the economy will boom

Australia has been successful in containing the initial spread of COVID-19. The shutdown has given the Australian economy the best chance to grow strongly over the next one to two years by minimising the chance of another outbreak. But it’s no certainty that it will be a smooth recovery as a second wave that would require another shutdown is still a possibility.

The best scenario is a 90 percent economy, where most sectors of the economy are operating close to normal but with social distancing restrictions in place. But some parts of the economy will remain severely affected or shutdown, such as regions reliant on international tourists, aviation and large events.

An expanded testing and tracing capability, combined with a low number of cases to begin with, means COVID-19 outbreaks can be acted on quickly. This means any future shutdowns could be localised and have a smaller impact than the wide scale shutdowns just experienced.

But even under this scenario, unemployment and underemployment will be much higher than pre-COVID and many businesses will be under extreme financial stress.

According to a recent survey, 69 per cent of firms expect demand for their goods and services to decline over the next two months. So workers and business owners will need government support for an extended period, possibly beyond the six-month timeframe the government has set for the JobKeeper and JobSeeker coronavirus supplement.

Consumers will remain cautious because of concerns about losing their job and will likely limit the consumption of many services due to a fear of catching COVID-19. International and possibly some State borders will remain closed for an extended period, although there is the chance they may partly reopen if testing becomes faster and more readily available. But even under this scenario, international tourism and migration will be much lower than pre-COVID. 

The worst-case scenario is that reopening the economy results in significant COVID-19 outbreaks which require wide-scale shutdowns to be reintroduced. Another long shutdown, or continual opening and reopening, will smash consumer and business confidence. Many businesses who just survived the April/May shutdown may close permanently if there will be ongoing shutdowns.

Under this scenario, the government will have no choice but to extend the JobKeeper and JobSeeker boost into 2021.

The RBA’s role in the short-term is to provide support to households and businesses to survive the downturn and to maintain stability of the financial system. If the economic downturn is deeper and longer than expected, the RBA can implement more aggressive action, notably quantitative easing, which involves a set amount of purchases of government bonds (rather than the more timid yield curve control which the RBA is currently doing). Once the shutdowns end and the virus is under control, the RBA’s stimulus will help the economy rebound.

The COVID-19 shutdown has caused job losses in most industries 

Workers and businesses in the accommodation and food services, arts and recreation and aviation industries have been hit hardest by COVID-19. The Australian Bureau of Statistics’ (ABS) payroll data shows that between March 14 and April 18, employee jobs decreased by 33 per cent and 27 per cent in the accommodation and food services and arts and recreation industries respectively.

The combination of strict social distancing measures, travel bans, border closures and consumer caution has resulted in many firms in these industries closing or seeing turnover fall significantly, with workers laid off or working fewer hours. 

The COVID-19 shutdown has affected all parts of the economy in some way. All of the 19 industries in the ABS payrolls survey have seen jobs and total wages paid decline over the March 14 and April 18 period. As people adjust to lower incomes or greater uncertainty about their jobs, households are likely to cut back spending, resulting in further job losses across all industries. 

The RBA’s baseline forecast is that “the unemployment rate peaks at around 10 per cent over coming months and is still above 7 per cent at the end of next year. A lower unemployment rate than this is possible if the reduction in labour demand is accompanied by a larger reduction in average hours worked, rather than by people losing their jobs.”

While most parts of the economy have been negatively affected by the COVID-19 recession, demand in some sectors have skyrocketed, such as supermarkets, hardware stores, personal protective equipment manufacturing and logistics and deliveries. But the job gains in these sectors are nowhere near enough to offset the job losses in other parts of the economy.

The property market recovery will depend on whether future outbreaks are contained

Australia’s property market will be hit hard under the worst-case scenario of repeated shutdowns extending into 2021. There will be significant job losses in most industries and if government support is not extended and banks do not allow households in financial hardship to continue to defer or reduce their mortgage repayments, then many people will fall behind on their mortgage and be forced to sell their homes. A large number of forced sales, combined with much lower population growth, will be the key drivers of significant price declines. 

But under the best-case scenario of a relatively short economic downturn, with any COVID-19 outbreaks localised and well-contained, the property market downturn will likely be fairly shallow. While property sales will fall substantially over the next few months, price falls will be more modest. The rebound is likely to be rapid as there will be many buyers with secure jobs waiting in the wings to buy if prices dip.

If you are concerned about your future interest rate and want to explore your finance opportunities, then contact us to investigate your options.