Daily Commentary BY THE CURVE TEAM –

RBA Outlines the Challenges and Unknowns Ahead

22nd of April, 2020

In his first speech since the extraordinary board meeting mid March, the RBA’s Governor Lowe outlined the magnitude of the economic task ahead for the nation.

For an economy that was already lacklustre prior to the onset of Covid-19 and its associated economic shock, yesterday Governor Lowe outlined the challenges of building the bridge to the other side. The Reserve Bank is now expecting GDP to fall by 10% in the first half of this year and unemployment to rise to 10%. However, they admitted that these estimates are far more uncertain than usual. There are simply too many unknowns for them to give clear and precise guidance.

The speech and following Q&A session (available here) are certainly worth a read as they provide a very good summary of how the financial system has reacted to the measures they implemented but they do leave one question open. They expect after a large and short lived contraction in the economy due to the containment measures, we may see a significant bounce back. This assumes the behaviour of consumers and investors for that matter remains largely unchanged. However, the RBA admits that that assumption is likely flawed:

“It is highly probable that the severe shocks we are now experiencing will change the mindsets of some people and businesses. Even after the restrictions are lifted, it is likely that some of the precautionary behaviour will persist. And in the months ahead, we are likely to lose some businesses, despite best efforts, and some of these businesses will not reopen. There will also be a higher level of debt and some households might revaluate the risks of having highly leveraged balance sheets.”

The key to the outlook is just what these changes in consumer behaviour will be. It is very likely that the economy domestically will reopen long before the external or international parts come back online, which does hold some positives. The unknown once again is how consumers will react to that.

Some suggest we will see a repeat to some degree of consumer behaviour post the GFC where people opted to pay down debt and build larger financial buffers. This arguably prudent measure led to, and would likely see again, people opting to consume less. It was noted after the GFC many substituted consuming items or shopping for eating out intermittently but this time that may not be the case. Similarly, it is likely that appetites for travel will change with some opting to stay domestically as opposed to taking short trips overseas. For others the exact opposite may be true when that which was prohibited is once again allowed.

Matthew Dunshea

Client Relationship Manager