MNI POLICY: RBA Sees Growth Recovery By Mid-2021, Jobs Worry

--Unemployment To Trough In June, Slow Pick-Up: RBA

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia expects the economic impact of

the Covid-19 disruptions to peak in the second and third quarters of this year,

then improving in mid-2021, according to the quarterly Statement on Monetary

Policy published Friday.

     The central bank sees GDP growth at -8% by end-June, with the economy

contracting 6% over the full year. Before the crisis, the RBA had seen 2020

growth at 2%,

     Policymakers still expect a brisk recovery, with much of the lost GDP

recovered by mid-2021, helped by the outlook for a rapid return to operations in

China, a stable price for iron ore - Australia's largest export commodity, and

an easing of drought conditions.

     Business investment is still expected to fall by 13% through December, with

household spending down 15% to the period to the end of June.

     Unemployment is seen jumping to 10% by mid-year, up from 5.2% in March, and

the RBA expects high levels of joblessness to persist for some time, seeing only

marginal improvement later this year, to 9% by December, and 8.5% by mid-2020.

     The rate would be significantly worse if not for the Federal Government's

A$130 billion JobKeeper program, which effectively pays employers to keep

workers on their books, the RBA noted.

     In other key metrics, the RBA sees CPI inflation turning negative to -in

June, before coming back to 2.75% by June 2021 and then falling to 1.5% by Jun

2022.

     "The inflation forecast takes into account the weak domestic demand

conditions but also the supply disruptions that will increase inflationary

pressures," the RBA Statement says.

     "The deflationary effects from the spare capacity in the labour market and

in the economy more generally are expected to be the dominating influence."

     The key to the economic recovery, the Bank says, remains the public health

measures to control the virus.

     "A stronger economic recovery would be possible if further gains in

controlling the virus were achieved in the near term and most containment

measures were phased out over coming months," the statement says.

     If there is a delay in the lifting of restrictions, with most remaining in

place until late this year with international travel resuming next year, then

the "outcomes would be even more challenging."

     On interest rates, the statement says the RBA will not increase rates until

progress is made towards full employment and inflation is "sustainably" within

the 2% to 3% target band.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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