Coronavirus economic update: RBA expects biggest contraction since 1930s

By Niko Iliakis ·

It's clear that the coronavirus pandemic has put extreme pressure on the economy, but recent comments by Reserve Bank Governor Philip Lowe put the extent of the current crisis into clear focus.

“Over the first half of 2020, we are likely to experience the biggest contraction in national output and national income that we’ve witnessed since the 1930s,” he said in a speech on Tuesday.

The RBA is forecasting a drop in national output of 10% in the coming months, with most of the decline occurring in the June quarter. The number of out-of-work Australians will also see a steep increase.

“The unemployment rate is likely to be around 10% by June, although I am hopeful that it might be lower than this if businesses are able to retain their employees on lower hours,” Lowe said.

While the numerous stimulus packages introduced by the Government will help many weather the downturn, a dip in household income is to be expected. Consumer spending is also unlikely to recover in the near term, given the restrictions on movement and social activity currently being enforced. 

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As for inflation, the RBA expects it to remain positive in underlying terms, but is bracing for a steep drop in the June quarter.

“The large fall in oil prices, combined with the introduction of free childcare and the deferral or reduction in some price increases mean that it is quite likely that year-ended headline inflation will turn negative in June,” Lowe said.

“If so, this would be the first time since the early 1960s that the price level has fallen over a full year.”

Lowe admitted that as more economic data comes in over the coming months it will present a “very sobering picture of the state of our economy.” At the same time, he stressed that the current crisis is a temporary one and that the country’s institutions are well-placed to handle it.

“As Australians digest this economic news, I would ask that we keep in mind that this period will pass, and that a bridge has been built to get us to the other side. With the help of that bridge, we will recover and the economy will grow strongly again,” he said.

When will the economy bounce back?

While mapping the exact course of the current downturn may be difficult, one thing is clear: economic recovery can only begin once the virus is contained and the restrictions on commercial activity are lifted.

“One plausible scenario is that the various restrictions begin to be progressively lessened as we get closer to the middle of the year, and are mostly removed by late in the year, except perhaps the restrictions on international travel,” Lowe said.

“Under this scenario we could expect the economy to begin its bounce-back in the September quarter and for that bounce-back to strengthen from there.”

Regardless of the timing, Lowe said the shock of the “twin health and economic emergencies” will probably linger in the minds of Australians for some time, causing many to reevaluate their attitudes towards spending, saving and debt.

“Even after the restrictions are lifted, it is likely that some of the precautionary behaviour will persist,” he said.

“We are all learning to work, shop and travel differently at the moment, and some of these changes will probably stay with us for some time, requiring a rethinking of business models.”

For information about the kinds of support available to individuals and households, along with other tips to keep your finances in good health amid the current crisis, browse our coronavirus financial guide.