Bulletin
Investor Alert

Aug. 7, 2020, 12:06 a.m. EDT

Australia's central bank lays out grim scenario

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

By David Winning

SYDNEY--Australia's central bank said the country's unemployment rate could stay near its peak throughout next year if Australia is roiled by a series of regional coronavirus outbreaks and rolling lockdowns to slow the pathogen's spread.

The so-called downside scenario was detailed in the Reserve Bank of Australia's quarterly statement on monetary policy published Friday. It was included alongside a discussion of the economic impact of a faster-than-expected recovery and the central bank's baseline projection for output to fall 6% this year, with the jobless rate soaring to around 10% by year-end.

So far, the RBA considers its support package for the Australian economy to be working as expected and that the downturn is not as severe as it had earlier anticipated.

Still, the RBA said the economic outlook is highly uncertain and it needs to consider all possible outcomes.

The RBA's baseline scenario assumes that authorities in Victoria bring the latest virus outbreak under control and other states or territories don't aggressively tighten restrictions. International travel would remain paused until the middle of next year.

That would pave the way for economic growth to rebound to around 5% in 2021, with the jobless rate falling back from a peak of around 10% this year to 7% over time. Underlying inflation would likely remain below 2% over the next couple of years, the RBA said.

Still, in a downside scenario, the RBA said a recovery in service exports would be delayed and consumer spending would fall further through December, despite continued policy stimulus and income-support measures.

"Business investment would also decline sharply," the RBA said of this downbeat view. "Domestic activity would take much longer to recover in this scenario, resulting in the unemployment rate remaining close to its peak throughout 2021."

On Tuesday, the RBA left its policy settings unchanged as it navigates the country's worst economic contraction since the 1930s, while reinforcing its strategy of yield curve control by signaling it would buy more bonds. Core inflation is expected to remain below the central bank's 2%-3% target band for a long time, locking in record-low interest rates for many years.

Much depends on what measures the government is prepared to introduce to cushion the economic impact of the Victorian outbreak and support jobs elsewhere. Treasurer Josh Frydenberg wants to withdraw some of the fiscal support put in place at the start of the pandemic, but economists warn of a looming fiscal cliff if that support is rolled back too quickly when the economy is in a fragile state.

Write to David Winning at david.winning@wsj.com

This Story has 0 Comments
Be the first to comment
More News In
Markets

Story Conversation

Commenting FAQs »

Partner Center

World News from MarketWatch

Link to MarketWatch's Slice.