Has the economy really reached a gentle turning point?

By Cameron Micallef

February 06 2020
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A leading economist has expressed disagreement with the Reserve Bank of Australia’s pronouncement that the domestic and international economies have reached a gentle turning point.

During his “the year ahead” speech at the National Press Club, RBA governor Philip Lowe called the coronavirus and the bushfires as short-term economic speed bumps and said Australia is likely to have strong economic growth over the next two years.

“As I have been saying for some time, we are passing through a gentle turning point for the better,” Dr Lowe said.

The Australian economy will expand by 2¾ per cent over 2020 and 3 per cent the following year, while global growth is expected to grow at 2.9 and 3.3 per cent, respectively, Mr Lowe said during his speech.

The Reserve Bank believes the trend unemployment, which is showing signs of reducing over the past couple of months will continue throughout 2020.

“In terms of the labour market, we are expecting the unemployment rate to remain around its current level for a while yet, before declining below 5 per cent late next year as growth picks up,” Dr Lowe said.

The Reserve Bank said it thinks unemployment will edge lower and wages should grow as the spare capacity in the market shrinks, as should an increase in consumption through larger wages.

“The unemployment rate is also expected to decline, which should give people the confidence to spend. So it is reasonable to expect that things will improve from here, although it is hard to be precise about how much longer this period of balance sheet adjustment will continue,” Dr Lowe explained.

However, Dr Lowe conceded that the drought and coronavirus outbreak could have a negative impact on the economy.

“There is, however, likely to be a noticeable effect across the December quarter last year and the current quarter. While it is still difficult to be precise, we estimate that the effects of the bushfires will reduce GDP growth by around 0.2 percentage points across the two quarters.”

“We are also continuing to assess the effects of the drought on the economy. Farm output declined by 16 per cent between 2017 and 2019, and farm exports fell by 13 per cent.”

“A new uncertainty affecting the outlook is the outbreak of the coronavirus. It is too early to tell what the overall impact will be, but the SARS outbreak in 2003 may provide a guide. On that occasion, there was a sharp slowing in output growth in China for a few months, before a sharp bounce-back as the outbreak was controlled and economic stimulus measures were introduced,” Dr Lowe stated.

Dr Shane Oliver believes, however, that the impact from the coronavirus and the bushfires will be more severe, with the Australian economy likely to see two more cuts before the second half of the year.

“The Reserve Bank has taken advantage of the better economic data we have seen over the last few weeks to leave rates on hold,” said AMP’s chief economist.

“I really see this as the Reserve Bank waiting and seeing. November retail sales strengthened slightly, jobs figures and building approvals for December were encouraging, and inflation numbers weren’t low enough to push the Reserve Bank into another rate cut,” Dr Oliver said.

However, the economist noted the good stacked against the potential green shoots were the bushfire and the coronavirus, which are likely to have a negative impact on the economy.

“In other words, even as interest rates remain on hold, we should be preparing for cuts in the near future as the economy continues to underperform and spare capacity continues in the labour market. Inflationary pressures, judging from recent data around food costs, is expected to remain low,” Dr Oliver explained.

The economist believes Australia could be heading down the quantitative easing path by the second half of this year.

“Watch out for up to two more rate cuts from the RBA this year, with one coming in in the next month or so, and another soon thereafter, taking the official cash rate down to 0.25 per cent. The next question, which we’ll probably encounter in the second half of the year, is whether the Reserve Bank undertakes a program of quantitative easing and what form that might take,” Dr Oliver concluded.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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