Reserve Bank upbeat, cautious on economic recovery but warns it could take years

The Reserve Bank has optimistically upgraded its key economic forecasts signaling a slow recovery from the pandemic-induced recession is underway.

Here's my report from The World Today

Economic growth or gross domestic product (GDP) is expected to bounce to 6 percent by June 2021 - up from a previous 4 percent - after contracting earlier this year by a massive 7 percent as fallout from the coronavirus ravaged output.

The slight upgrade to GDP from the previous statement reflects stronger-than-expected household consumption and additional government support through programs such as JobKeeper.

"The less negative outcome stemmed largely from Australia's early success in bringing new infection rates down, which allowed restrictions on activity to be eased sooner than thought," the RBA says in its closely-watched quarterly statement on monetary policy.

But the RBA warns the severity of the downturn this year means economic growth is not expected to return to its pre-pandemic level until the end of 2021.

Deputy RBA government Guy Debelle told a parliamentary hearing last week that September quarter GDP was expected to show positive growth which would confirm the end to a "technical" recession defined by two consecutive quarters of contraction. 

Unemployment is now forecast to peak at just below 8 percent in December this year after initial estimates it would surge beyond 10 percent.

But the jobless rate is expected to remain stubbornly high and decline only gradually to 7.5 percent in June 2021 and 6 percent in December 2022.

However, consumer inflation has been downgraded slightly with both headline and trimmed mean measures forecast to bottom out at one percent before reaching 1.5 percent by the end of 2022.

The RBA says the COVID-19 outbreak in Victoria and associated restrictions slowed the initial phase of the recovery.

"Output growth in the September quarter is estimated to be around 2 percentage points lower that if that outbreak had not occurred," the RBA says.

"Outside Victoria, consumer spending has recovered noticeably and labour market conditions have improved but still remain below levels seen prior to the pandemic."

The upgraded forecasts come after a historic week in which the Reserve Bank cut the cash rate to a new record low of 0.1 percent and unleashed a program of quantitative easing to buy $100 billion of government debt over the next six months.

The switch to unconventional monetary policy - where the central banks buys swathes of government debt to push down bond yields and borrowing costs - comes after last month's Federal Budget signalled debt as high as $1.7 trillion in coming years from emergency programs.

The statement says emergency government support was critical in preventing a deeper recession.

"The significant support from both fiscal and monetary policy has been effective at preserving many jobs and businesses through the period of activity restrictions," the RBA says.

"The scale of the support has been in sharp contrast to the experience in past downturns."

The Reserve Bank also revealed a "downside" scenario where major outbreaks force tighter activity restrictions, international borders remain closed for longer and unemployment will increase.

The "upside" scenario is based on better health outcomes where ongoing control over the virus would boost confidence and possibly take unemployment back to 5.5 percent by the end of 2021.

After slashing the cash rate close to zero earlier this week, the RBA said it was not contemplating another cut and said negative interest rates were "extraordinarily unlikely".

"The Board considers there is little to be gained from short-term interest rates moving into negative territory," the statement says.

However, the RBA says it is prepared to do more to stimulate the economy and will undertake additional purchases of government debt if necessary.

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