Economic outlook sours in just a few weeks

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What a difference a couple of weeks can make during a pandemic.

At the start of the month, Reserve Bank of Australia governor Philip Lowe, following his monthly board meeting, was extolling the virtues of Australia’s economic recovery and how it was on a “positive path”.

Two weeks later, economists are now warning of the prospect of Australia recording a contraction in the September quarter as a result of twin lockdowns in Australia’s two biggest cities.

The RBA will release the minutes of the July 6 board meeting on Tuesday.

Given the coverage that board meeting received following a rare media conference and a subsequent speech by Dr Lowe, the minutes were always unlikely to throw up anything new.

However, they have been made even more dated by the now-lengthy NSW COVID-19 lockdown, and notably the shutdown of its construction industry, as well the rigid Victorian restrictions which are now set to be extend beyond their initial five days.

Capital Economics expects this will result in the economy shrinking by 0.5 per cent in the September quarter.

At this month’s board meeting, RBA members agreed to keep the cash rate and its three-year bond yield target at a record low 0.1 per cent.

It also made adjustments to its bond-buying program, aimed at keeping market interest rates and borrowing rates low.

From September, the RBA will purchase $4 billion worth of government bonds a week, a reduction, or taper, from the current rate of $5 billion a week.

“The growing economic hit from the lockdowns raises the question of whether additional policy support will be enacted,” St George economist Matthew Bunny said.

“It is difficult to see how the RBA would continue with plans to taper if restrictions continue to drag on. It is even possible the RBA could increase the rate of bond purchases.”

The weekly ANZ-Roy Morgan consumer confidence index is also released on Tuesday.

Consumer confidence is likely to take a hit from the Sydney and Melbourne lockdowns.

While confidence is a pointer to future household spending, retailers are already facing the reality of the COVID-19 restrictions.

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