RBA Expects GDP Rebound in September Quarter, yet an Unpredictable Recovery

October 28, 2020 Updated: October 28, 2020

The Reserve Bank of Australia (RBA) expects the national economy to get back on track, following its contractions in the March and June quarters. While this may indicate the end of the recession, the central bank cautioned that the recovery would be unpredictable due to a wide range of uncertainties.

During a video conference with the Senate Estimates on Oct 27, RBA deputy governor Guy Debelle said the September quarter was likely to see the gross domestic product (GDP) turning around from negative growth, and the drag on the economy from Victoria would be less than expected.

“At the moment, our best guess is it looks like the September quarter for the country recorded positive growth rather than slightly negative,” Debelle told the senators.

“As best as we can tell, the growth elsewhere in the country was more than the drag from Victoria, and possibly the drag from Victoria was a little less than what we guessed back in August,” he said.

Australia’s economy entered its first recession in 29 years, after recording a 0.3 percent and then a 7 percent contraction in GDP respectively in the March and the June quarters.

Debelle’s remarks came as the Victorian state government announced it was going to reopen its economy from the midnight of Oct. 27 after a 112-day restricted lockdown.

At the August monetary policy board meeting, RBA had forecasted that if Victoria extended its six-week stage 4 restrictions and international border restrictions remained in place till the end of 2021, GDP would not recover in the second half of 2020.

Economic Recovery to be Unpredictable

Despite the optimistic estimate for growth in the Sept. quarter, Debelle revealed that challenges in forecasting at the moment were enormous.

“The range of uncertainty around the numbers at the moment is as large as it has been in my career,” he told the hearing. “We are having a lot of trouble trying to understand where we are, let alone where we are going.”

He also said the RBA has not yet factored in the impact of state border closures in its economic modelling.

Debelle’s comments align with the latest  ANZ-Roy Morgan consumer confidence index released on Oct 20.

While recording its seventh straight gain to the highest reading since March, the index also suggests that people remain cautious about the economic outlook.

RBA assistant governor Michele Bullock also tempered the outlook of recovery in her Oct. 27  speech entitled ‘Financial Stability in Uncertain Time’, in which she explained that the economic recovery would be unpredictable and uneven.

Bullock emphasised that while a range of supporting measures, including income support, loan repayment deferrals and temporary insolvency relief, are keeping businesses and families afloat, some of these measures will soon come to an end and there is uncertainty about others.

“With a very uncertain economic recovery, this raises issues about the resilience of businesses and households and ultimately about the credit quality of banks’ assets,” she said.

She expects that around a quarter of small businesses that were currently receiving income support would close if the government supports were removed now and trading conditions had not improved. This would further translate into financial losses to banks.

“There is going to be further pressure on banks’ profits and capital over the coming year,” Bullock said. “The main way this will happen is through credit losses – both through business and household loans.”

“While not all business failures will result in losses for the banks, it will have an impact on banks’ balance sheets, ” she said.

Further Interest Rate Cut on Agenda

Earlier this month RBA governor Philip Lowe indicated the central bank was considering further monetary easing to support economic recovery, sparking speculation that the RBA could cut interest rates even further.

“As the economy opens up, it is reasonable to expect that further monetary easing would get more traction than was the case earlier,” he said at Citi’s 12th Annual Australia and New Zealand Investment Conference.

Lowe has also said the central bank will put more weight on actual, not forecast, inflation until there is a return of a tighter labour market, warning that the cash rate would not increase for at least three years.

However, Debelle declined to offer any hint on whether the bank would initiate significant quantitative easing program on Nov. 3 when RBA is expected to update its outlook for the economy.