The unemployment rate will climb by 1 million at the end of the June quarter to around 10 per cent, alongside an expected drop in total hours worked by around 20 per cent, according to the RBA’s latest economic projections.
Noting a forecast contraction in GDP of around 10 per cent over the first half of 2020, the RBA said that beyond June, the outlook depends on how long social distancing remains in place and its effects on economic activity.
“A plausible baseline scenario is that the various restrictions are progressively relaxed in coming months and are mostly removed by the end of September, except for some restrictions such as international travel,” the RBA’s statement on monetary policy reads.
“If this occurs, and the spread of the virus in Australia remains limited, GDP growth is likely to turn around in the September quarter and the recovery would strengthen from there.”
On the other hand, the RBA admitted that it is also possible that the outbreak persists for longer than expected or flares up again, which would see mandated restrictions on domestic activity eased more gradually, international travel restrictions in place well into next year, and prolonged precautionary behaviour.
This would mean that GDP recovery will be delayed and more lasting effects will be had on business balance sheets, as well as damage to employment and supplier relationships as jobs are lost and businesses fail.
“In all scenarios, we assume that current fiscal policy settings remain in place in accordance with public guidance. However, the extent of the stimulus provided by the JobKeeper payment — which is the largest component of the fiscal response — and other assistance payments will depend on outcomes for business cash flow and employment in each scenario,” the RBA said.
Based on its baseline, gradual recovery scenario, growth is expected to be stronger over 2021 as business investment gradually recovers, with the GDP seen to bounce back to a 7 per cent growth in June next year, from a 6 per cent contraction at the end of 2020.
The unemployment rate is expected to decline substantially from its June 2020 peak, but is predicted at 7.5 per cent at the end of next year and 6.5 per cent in June 2022.
However, if Australia achieves further gains in controlling the virus in the near term and phases out most containment measures over coming months, then the RBA predicts unemployment to return to pre-COVID-19 levels by mid-2022.
“The stronger recovery would enable some catch-up in wages growth. Similarly, the stronger recovery would be consistent with a faster pick-up in inflation over the next few years, albeit from a low starting point,” the central bank said.
