Insight: Odds of RBA’s Upside Scenario Rise As Morrison Signals Faster Easing

• Published on
• 08 May 2020, 06:04 PM

By Sophia Rodrigues

Australian Prime Minister Scott Morrison’s plans to ease restrictions in the economy may be earlier than what the Reserve Bank has assumed in its baseline forecasts, raising the odds for the economy to outperform versus the baseline.

In the May Statement on Monetary Policy, published Friday, the RBA compiled baseline forecasts on an assumption there would be further easing in restrictions based on the knowledge that the National Cabinet was due to meet on Friday.

However, Morrison’s plan suggests possibility of more aggressive loosening in restrictions, and thus greater chance that the RBA’s forecasts for stronger economy recovering could eventuate.

RBA’S UPSIDE SCENARIO

Under the upside scenario, the RBA expects the unemployment rate to return to around 5% in a couple of years and the level of GDP in two years to fall only slightly short of the forecasts in the February Statement on Monetary Policy.

The baseline forecast is for the unemployment rate to rise to 10% by June, and only gradually fall to 9% by December, 8.5% by June next year, and 6.5% by June 2022.

In this scenario, GDP growth is expected to fall 8% y/y in June, including a 10% fall in the second half. Inflation is expected to rise just 1.5% in June 2022, both headline and trimmed mean.

A key factor for all scenarios – baseline, upside and downside – is how soon restrictions are lifted because employment, re-opening of businesses and pick-up in household spending would be dependent on that. In the latter part of the forecast period, the recovery would depend on business investment decisions.

Under the baseline scenario, the RBA expects various restrictions to be progressively relaxed in coming months, and, with the exception of international travel and large gatherings, to be mostly removed by the end of September.

But Morrison announced a more aggressive plan consisting of loosening done in three steps where he aspires to restore 850,000 jobs by July. Those jobs include those who are currently on JobKeeper or JobSeeker. This three-step plan could be implemented well before the end of the third quarter if Australia maintains the trajectory of the current virus flattening curve.

EDUCATION EXPORT AN UPSIDE RISK TOO

Significantly RBA’s baseline forecasts assume international travel restrictions to be gradually lifted from the start of 2021 and therefore education export to rise quickly at the start of the 2021 academic year.

Morrison, on the other hand, is open to the possibility of opening up Trans-Tasman, pacific island and international student travels in Step 3 of his plan.

“Issues of international students, you'll note that it does come into the third step of the plan and that is a possibility and how you would work that through, well, they'd have to be carefully tested. So, we are open to that, and we would be working with institutions to see how that could be achieved,” Morrison said.

--Contact: sophia@centralbankintel.com