Debate Rages Over Shape of Australia’s Economic Recovery

(Bloomberg) -- Economists are divided on the outlook for Australia's recovery: Many expect it to be U-shaped, while a growing number see a W shape. Both support the central bank's view that interest rates will remain low for a long time.

The Reserve Bank of Australia is set to keep its cash rate and three-year bond yield target at 0.25% at Tuesday's policy meeting. Governor Philip Lowe's focus then will turn to the government's July 23 economic and fiscal statement that will set out plans for ongoing stimulus.

“The shape of the recovery will be first and foremost determined by consumer confidence,” said Janu Chan, a senior economist at St. George Bank Ltd., who expects it will be U-shaped. “Financial-market participants see a high chance of a W-shaped recovery, due to elevated concerns about a second wave of infections and the end of key stimulus measures.”

An audience poll during Bloomberg's ‘Inside Track' webinar series showed a similar divide. Some 41% of respondents expected Australia's recovery to be U-shaped, while 34% saw a W-shaped path.

Job advertisements soared by a record 42% in June as coronavirus restrictions were eased further across much of the nation, according to data Monday from Australia & New Zealand Banking Group Ltd. Yet ANZ also noted that a spike in new Covid-19 cases in Melbourne posed a risk to the pace and timing of recovery.

New South Wales and Victoria are shutting their border as the latter ordered residents across 12 areas of Melbourne to stay at home, other than for work, exercise, medical appointments or essential shopping. At the weekend, authorities took Australia's toughest virus control measures to date, with 3,000 residents of nine public-housing towers put under lockdown and barred from leaving their apartments.

New Outbreak

The revival of confidence in the economy is likely to be tempered by fears about Victoria's renewed outbreak.

“A whole lot of businesses wouldn't be sustained a second time through, a lot of households wouldn't be sustained a second time through, and the government could not be as generous,” RBA board member Ian Harper said in an interview last month, talking about another shutdown. “If you add on top of that the devastating impact that would have on public confidence, that's the one that really bothers me.”

The central bank scooped up more than A$50 billion ($34.8 billion) of government securities in the weeks after an emergency meeting in March, as it tried to soothe dislocated markets and lower borrowing costs. It hasn't bought anything further since early May, as the three-year bond yield remains around the bank's target.

The RBA has been urging the government to maintain stimulus support beyond September, when programs such as a wage subsidy to keep workers tied to employers, higher unemployment payments and other support measures are due to expire. The fear is that the economy could be set back if some of these programs aren't extended.

“If there were no tapering and for whatever reason the government decided just to let it stop, then I think we haven't seen the peak in unemployment,” Harper said.

Australia's jobless rate advanced to 7.1% in May, and the Treasury expects it to reach 8% this quarter.

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