Australia’s economic future depends on containing the spread of the coronavirus and how well it can create jobs going forward, the head of Australia’s central bank said, as the country charters difficult conditions including a contracting economy, high unemployment and state border closures.
Reserve Bank Governor Philip Lowe is watching how New South Wales manages small breakouts of the COVID-19 coronavirus, describing the management as a “test case” illustrating how other state economies can operate in the midst of a pandemic.
“If NSW can manage some limited community transmission with first rate testing, contact testing and tracing...if that can work then we should be able to open up the economy,” Mr Lowe told a parliamentary committee today.
“It should give us confidence that we could keep on top of it … That you can open up, give people some freedom, have economic (activity) … and have some control.
“If NSW can’t make this a success, then we’re going to face a lot more challenges.”
Containing the coronavirus spread is key
Mr Lowe, addressing a House of Representatives’ Standing Committee on Economics, provided “sobering” insights on the country’s economic health.
“We are expecting the Australian economy to contract by around 6 per cent this year, and then grow by 5 per cent next year and 4 per cent in 2022,” he said.
Victoria’s second lockdown -- due to a rising number of COVID-19 cases, including 278 yesterday -- is likely to reduce GDP growth in the September quarter by 2 per cent, and broadly offset the recovery taking place in most other parts of the country, Mr Lowe said.
“The reality we face is the economy is not going to recover until we get on top of the virus,” he said.
“If we were to see further setbacks in detaining the virus the recovery will be detained even further.”
Help job creation and we’ll ride it out
Containing the coronavirus was one part of a two prong plan, Mr Lowe said. He was steadfast in asserting job creation as being key in minimising the collateral of a recession.
The Reserve Bank is forecasting unemployment to rise to 10 per cent by the end of the year, before gradually declining to 7 per cent, where it’s expected to hover for “a few years’ time”.
The rate could be higher too were it to include people whose weekly work hours were reduced to zero.
“Let’s get people to have jobs and then we can worry about the wages,” he said, in response to questioning on low wage growth among younger workers at risk of career scarring.
“If they don’t have jobs, it hurts the economy and it hurts society and causes other problems.
“(Job creation) should be our singular focus.”
Should mortgage holidays be extended, again?
The goal of stimulating job creation oriented the policies the Reserve Bank is both putting into practice and considering.
When asked about further delaying people’s mortgage repayments -- a measure formally extended by four months yesterday -- Mr Lowe said a minority of people had relied on the relief measure.
“It’s too early to be talking about further deferrals at this stage,” he said.
“About 10 per cent (of people have deferred their mortgage repayments) … It’s a significant number, but not the majority.
“The solution to most of the problems we face is more jobs … If you’re worried about loan deferrals, then it comes back to creating jobs.”
What about negative interest rates?
Standing committee member Dr Andrew Leigh prodded Mr Lowe on his decision to not introduce negative interest rates, instead choosing to hold the cash rate at the effective lower bound of 0.25 per cent.
“Wouldn’t a year of negative rates be better than a decade of zero rates?,” Dr Leigh asked.
Mr Lowe said he hadn’t ruled out negative interest rates, but noted they were “extraordinarily unlikely”, because they would provide little relief and impair the credit lending abilities of banks.
“I don’t think the cost-benefit justifies negative interest rates,” he said.
“... It’s not about (bank) profits, it’s really about jobs.
“Negative interest rates would hurt jobs...and arguably, make it worse.”
Jobs, jobs, jobs
Mr Lowe ended his opening statement by stressing the importance of creating an environment where jobs would be born.
“High unemployment is likely to be with us for some time, which should be a concern for us all,” he said.
“The Reserve Bank will do what it can with its policy instruments to support the journey back to full employment.
“Beyond that, government policies that support people's incomes, that add to aggregate demand through direct government spending and that make it easier for firms to hire people all have important roles to play.
“We need to make sure that Australia is a great place for businesses to expand, invest, innovate and employ people.”