RBA Statement of Monetary Policy- May 2020

Increasing uncertainty over the future has further dampened economic activity, with the RBA expecting a decline in GDP of 10% by June. The two largest components of Aggregate Demand (AD), Consumption (C) and Investment (I) continue to show signs of weakness despite muted optimism over a “V” shaped recovery.

Over in China, industrial production and investment spending have started to rebound. Retail spending continues to remain weak, reflecting the impact of lingering concerns on consumer sentiment. Recent calls for an independent inquiry into the origins of COVID-19 have resulted in politically driven trade backlash against Australian exporters. China has blocked imports from four of Australia’s largest beef exporters and is considering a 70% tariff on barley exports. A drop in exports to China would further exacerbate Australia’s economic situation. This situation stands in stark contrast to the GFC where the Australian economy was supported by resource exports to China.

The contraction in economic activity continues to spill over into the labour markets. Official unemployment rates are unlikely to capture the full extent in decline of labour utilisation as many employers have sought to reduce hours of work instead of retrenching workers. It is estimated that hours worked have reduced by 20%. The unemployment rate is expected to increase to 10% but would have reached 17% by June if not for the JobKeeper wage subsidy program. The program is designed to preserve employment relationships for a faster economic recovery.

The RBA’s QE program was extended in April through an additional $50 billion of liquidity provided to the banking system. This has helped to ensure that credit markets remain open and firms can access financing to meet short term obligations. While the economy is beginning to emerge from the “Great Lockdown”, a fully-fledged recovery is far from certain.