The Reserve Bank of Australia has said the recovery from the current economic downturn will be significantly different to the recovery from past economic shocks such as the Global Financial Crisis and the Great Depression.
RBA Head of Economic Analysis Brad Jones said in a keynote address at the Minerals Week Australia-Asia Investment Outlook that the current economic shock was different from other episodes, giving the current economic recovery a brighter outlook.
One difference is the origins of the COVID-19 economic contraction, which originated from a severe shock in the global supply chain, unlike the GFC, which originated from the collapse in parts of the financial system.
Another key difference is the “unusual size and composition” of government policy response, which has left household and business balance sheets in better shape than before the economic downturn.
Jones said that domestic and international economic activity snapped back after restrictions lifted, which reflected the “unique nature” of the current financial crisis.
“Indeed, the speed of the recovery in activity and the labour market in Australia bears little resemblance to past downturns,” he said. “This should give us some hope that less economic scarring will result.”
The RBA thinks that higher household savings could lead to an accelerated rise in private consumption and investment. If this were to eventuate, unemployment would fall faster, and inflation would pick up more rapidly.
Jones said uncertainty and risk aversion behaviour, which usually follow an economic downturn, may also not linger this time around.
“Here in Australia, it would seem premature to completely rule out the possibility of an overhang of cautious behaviour by households and firms, as seen internationally following previous shocks like the Great Depression and the GFC,” he said.
According to its latest figures, the Australian Bureau of Statistics said private investment rose 5.3 percent in the March quarter, contributing 0.9 percentage points to the country’s gross domestic product growth.
Household spending also increased by 1.2 percent; however, it is still below pre-pandemic levels. The growth in spending has also surpassed the rise in disposable income, and the household savings to income ratio has declined from 12.2 to 11.6 percent.
Treasurer Josh Frydenberg said it was extremely encouraging that the economic recovery was being driven increasingly by the private sector, despite government support more than halving.
“Only five other countries can boast an economy that’s larger now than before the pandemic,” Frydenberg said in the March quarter National Accounts press conference. “And we achieved that goal while keeping COVID numbers lower than almost anywhere in the world.”
He added that the Victorian lockdowns were a reminder of the uncertainties around the current challenges.
“Challenges remain. We cannot be complacent,” Frydenberg said.
Shadow Treasurer Jim Chalmers said economic recovery could not completely take hold until the nation had fewer lockdowns, which depended on the vaccine rollout.
“Australians can’t bank on a first-rate recovery when their government is in the bottom-third of nations rolling out vaccines,” Chalmers said.
Meanwhile, the RBA has decided to maintain its official interest rate at 0.1 percent, saying inflation remains low and under the bank’s target.