RESERVE BANK LOOKS AHEAD
In its latest quarterly statement on monetary policy, the Reserve Bank has set out three scenarios for the economic outlook.
BASELINE SCENARIO - The baseline scenario assumes the domestic vaccine rollout accelerates in the second half of the year and the international border is reopened gradually from early 2022. It also assumes no further big outbreaks, no extended hard lockdowns within Australia, and that any restrictions imposed are brief. The economy is expected to grow by around 4.75 per cent over 2021 and 3.5 per cent over 2022, tracking below pre-pandemic forecasts mostly due to lower population growth. Unemployment will improve to five per cent by the end of 2021 and 4.5 per cent by mid-2023, from 5.6 per cent now.
UPSIDE SCENARIO - A stronger economic trajectory is possible if households increase spending more than expected. The RBA says this could be in response to stronger wealth effects from house prices and a decline in uncertainty that encourages people to draw down on savings, fuelling the labour market and feeding back into faster income growth. The unemployment rate would fall at a faster pace and to a lower level around 3.75 per cent. This would see inflation warming to around 2.25 per cent by the middle of 2023, which would unlock rate rises.
DOWNSIDE SCENARIO - A weaker growth path would see households choose to spend their income and any savings more slowly. Wealth effects on consumption are smaller, as households divert more of their financial resources to strengthening their balance sheets. Subdued consumption and private investment results in weaker labour income and the unemployment rate remaining above pre-pandemic levels. This in turn sees underlying inflation remaining around 1.5 per cent over the forecast period through to mid-2023 and rates firmly on hold.
Australian Associated Press
