Sunday , November 29 2020
Home / Federal Politics / Economy to rely on households and government for years: RBA

Economy to rely on households and government for years: RBA

Unemployment is now predicted to reach 10 per cent by year’s end and still be at 8.5 per cent in December next year. Such a high jobless rate will weigh on wages, which are now expected to grow at 1.25 per cent for the next two years.

Loading

More than a third of firms expect to freeze the wages of their workers over the coming 12 months, a higher rate than that experienced during the global financial crisis.

RBA assistant governor Luci Ellis said the economy had done a bit better than initially expected but the recovery would now stretch into years, partly because of the pain caused by the Victorian shutdown.

“The recovery is expected to be slow and uneven and GDP will probably take several years to return to the trend path expected prior to the virus outbreak,” Dr Ellis said.

The bank said one of the major factors determining the speed and shape of the recovery would be ongoing fiscal spending, including investment in recovery programs such as job training, incentives for spending, wage subsidies and reduced taxes.

A comparison of the financial support from 14 developed economies showed Australia ranked 10th, well behind nations including Canada, New Zealand, Japan and the United States.

RBA assistant governor Luci Ellis says the number of new household formations will likely fall due to the recession.

RBA assistant governor Luci Ellis says the number of new household formations will likely fall due to the recession.Credit:Joe Armao

Business investment is now expected to contract by 17 per cent this year and only recover on the back of the mining sector through 2021. The RBA expressed caution around claims by federal and state governments that fast-tracking approvals for major private sector projects would boost the economy, only saying they “could” bring forward “some” work.

Households, buoyed by the government’s JobKeeper wage subsidy, early access to superannuation and the coronavirus supplement, will be key to the economy’s fortunes over the coming two years, especially with the international border now expected to remain closed until mid-2021.

Spending from households is expected to outpace general economic activity through 2021 and 2022.

Dr Ellis said population growth had slowed noticeably. The poor jobs market would also weigh on the decisions of couples who might have considered moving in with each other.

“Weak labour market conditions will also discourage some people, especially young people, from forming new households,” she said.

Westpac’s chief economist, Bill Evans, said the RBA highlighted the “real tragedy” faced by the Australia, with the economy likely to be 7.3 per cent smaller in 2021 than if the coronavirus had not appeared.

He said with the RBA’s deteriorating forecasts for unemployment, and inflation to still be around 1.5 per cent by the end of 2022, interest rates would not be lifted until at least 2023.

Commonwealth Bank head of Australian economics Gareth Aird said the size of the economic downturn meant the government had to maintain financial support.

“The fiscal tap needs to remain turned on to continue to support income in the economy in the face of such a significant contraction in spending and production,” he said.

Sign up to our Coronavirus Update newsletter

Get our Coronavirus Update newsletter for the day’s crucial developments at a glance, the numbers you need to know and what our readers are saying. Sign up to The Sydney Morning Herald’s newsletter here and The Age’s here.

Most Viewed in Politics

Loading

About admin

Check Also

We must refuse to be pawns in Iran’s hostage game

Moore-Gilbert was freed from prison and handed over to the Australian ambassador in Tehran as …