Main site

Australia in recession: the key factors affecting our economic recovery

4 mins read

Given the current climate during COVID-19, we believe this article will be of use for you during this challenging time.

All eyes will be on the RBA in November and December as it ponders a potentially significant rate cut. But there are other factors to consider in the face of a very uneven recession.

Australia in recession: the key factors affecting our economic recovery

Empowering Your Client articles are specifically written for you to share with your clients to help improve their understanding of the importance and value of financial advice. This content is free for financial advisers to share and reproduce on your own website, social media, printed communications and emails. We hope you find it useful.

While scepticism toward negative interest rates is strong in sections of the Australian banking and financial services industry, it seems likely that the Reserve Bank of Australia (RBA) will ease the policy further in the coming months.

The Federal Government’s policy response to the COVID-19 pandemic has been central to getting the Australian economy through the past seven months in better shape than the economies of many other nations. Or as Reserve Bank Governor Philip Lowe put it: “In previous downturns, it was monetary policy that played the leading role, but this time it has been fiscal policy that has taken the lead.”

In a mid-October speech – The Recovery from a Very Uneven Recession – Lowe outlined the road ahead. He referenced four key factors affecting the economic recovery: how successful we are in containing the virus; how effectively we deal with the shadow of the very uneven recession; how willing people and businesses are to draw on their accumulated financial buffers; and economic policy, including monetary policy.

“All recessions are uneven, but this one has been especially so,” he said. “The government has wisely sought to even things out, but inevitably we are left with outcomes that are very uneven across the country.”

This unevenness is especially evident in the labour market, with younger people and hospitality workers disproportionally affected and small businesses hit harder than large ones. There are also clear regional differences, with the recovery strongest in Western Australia while Victoria slowly emerges from its ‘second-wave’ lockdown. Then there are the factors that are harder to quantify.

“The way business is done is also changing and it is possible that people and firms living through a pandemic become more risk averse, affecting their appetite to spend and invest,” Lowe says.

“This all means that we are likely to see a period of heightened structural change in our economy. As a consequence of this and the recession we will see a pick-up in the number of business failures and households facing financial stress.

“How well we support those who are most affected, while at the same time capitalising on the new opportunities, will shape the recovery over the next few years.”

Potential policy options

In response to the update, Ryan Felsman, Senior Economist at CommSec, said the November and December Reserve Bank Board meetings were now ‘live’ events, with the likelihood of a potentially significant rate cut.

“The RBA may announce purchases of longer-dated (5 to 10 year) government bonds in the secondary market,” he said. “There is also the potential for the RBA to lower the cash and 3year bond target rates from 25 basis points to 10 basis points. Given that short-term market interest rates are already below this level, purchases of 5 to 10year government bonds are likely to provide the main support for the economy.”

Lowe and the RBA Board are working through three issues as part of the central bank’s overall assessment of whether to ease policy. These considerations include:

  • How much potential traction any further easing will offer the economy;
  • The potential effect on financial stability; and
  • Considering what international central bank counterparts are doing before making any new policy moves.

Part of their deliberations has included the possible impacts of policy easing on the real economy.

“To the extent that an easing of monetary policy helps people get jobs, it will help private sector balance sheets and lessen the number of problem loans ... it can reduce financial stability risks,” Lowe says. But, he added, this needs to be assessed against “any additional risks as people take more investment risk in the search for yield” and “we also need to take into account the effect of low interest rates on people that rely on investment income”.

While Felsman says the RBA has been unequivocal in stating that interest rates won’t increase “for at least three years”, policymakers seem less enthused about using up their last remaining quasi-conventional monetary policy bullet.

“In recent communication, Deputy Governor Guy Debelle walked economists and investors through a list of four potential policy options. The first cab off the rank was buying bonds further out along the yield curve, supplementing the three-year yield target. The second was currency intervention. The third included lowering the current structure of rates in the economy. And the fourth was negative interest rates,” Felsman says.

Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only. Philip Lowe is external and not a member of the Commonwealth Bank of Australia Group of Companies (the Group) and the content or any view expressed by Philip Lowe does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. CBA, nor members of the Group accept any liability for losses or damage arising from any reliance on external parties, their products, services and materials. Past performance is no guarantee of future performance.

Infographic
Reporting Season

Enjoying the article?

Get a monthly dose of financial advice, insights and practical tips!

required
required
required

Want to talk?

We'll get a Business Development Manager to call you.

required
required
required