RBA View the Medium-Term Outlook as Uncertain

The RBA’s Governor Lowe spoke yesterday and conceded that the outlook for the medium term is contingent on several underlying factors.

Sitting on a Panel for the ANU Crawford Leadership Forum – Global Economy and COVID-19, Governor Lowe made several remarks on the impacts of Covid-19 and the short and medium term outlook for the economy. In what were somewhat mixed tones, Lowe was optimistic on the short term yet conceded the medium-term outlook hinges on structural reform to the economy.

Whilst the RBA is pleased that the to date effect on the economy from Covid-19 has been less than their worst case fears, we have still experienced a major shock that will have significant and long lasting impacts. Lowe remarked:

“When we get to the other side, we face a world where there will be a shadow for a number of years – a slower growth world with lower borrowing and weaker population dynamics.”

Lowe emphasised that the nation has “fantastic fundamentals”, yet the risk to the medium term outlook is that without significant structural reform we will simply “meander” along:

“I have been concerned about this for some time and I am more so now. We have low R&D spend, low business formation. We are not as dynamic as we used to be.”

Without reforms there will be slower growth in Australia which can’t be resolved by increasing borrowing. This implicitly puts the onus on the government, not the RBA, to drive growth. Although Lowe did concede that steps taken by the RBA over the last few month have helped. Touching on Prime Minister Morrison’s bridge metaphor, he summarised the challenge as simply:

“We can borrow to build the bridge, but we can’t borrow to address a slower growth world.”

Lowes viewpoint is remarkably simply amid such a clouded outlook. Emergency measures have been and remain necessary to fund the significant measures to address the economic shock from Covid-19. However, these levels of borrowing are arguably unsustainable and in order to repay that debt, significant economic growth over the medium term will be needed.

Matthew Dunshea