Business Daily Media

The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it

  • Written by Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

The Reserve Bank’s long-awaited two-year forecasts for jobs, wages and growth are frightening[1], but I fear they are not frightening enough.

The bank looks two years ahead every three months. The last set of forecasts, released at the start of February, mentioned coronavirus mainly as a source of “uncertainty”.

That’s how much things have changed.

Back then economic growth was going to climb over time, consumers were going to start opening their wallets again (household spending had been incredibly weak[2]) and unemployment was going to plunge below 5%.

The forecasts released on Friday come in three sets – “baseline”, an earlier economic recovery, and a later recovery.

Baseline[3]”, the central set with which we will concern ourselves here, is both shocking, and disconcertingly encouraging.

The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it Reserve Bank Statement on Monetary Policy, May 2020[4] On employment, it predicts a drop of more than 7% in the first half of this year, most of it in the “June quarter”, the three months of April, May and June that we are in the middle of. Thirteen million of us were employed in March, making a drop of 7%, a drop of 900,000. Put differently, one in every 13 of us will lose their jobs. Harder to believe is that by December next year 6% of the workforce will have got them back. It sounds like what the prime minister referred to earlier in the crisis as a “snapback”, the economy snapping back to where it was. Except that it’s not. The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it Reserve Bank Statement on Monetary Policy, May 2020[5] Six per cent of a small number is a lot less than 7% of a big number. The bank’s forecasts have far fewer people in work all the way out to mid 2022 (the limit of the published forecasts) and doubless well beyond. The unemployment rate would shoot up to 10% by June and take a long while to fall. The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it Reserve Bank Statement on Monetary Policy, May 2020[6] The baseline economic growth forecast is also drawn as a V. After economic activity shrinks more than 8% in the June quarter, we are asked to believe it will bound back 7% in the year that follows. But that will still leave us with much lower living standards than we would have had, missing the usual 2-3% per year increase. The Reserve Bank thinks the recovery will look V-shaped. There are reasons to doubt it Reserve Bank Statement on Monetary Policy, May 2020[7] The reason I fear the baseline forecasts aren’t frightening enough is that they are partly built on a return to form for household spending, which accounts for 65% of gross domestic product. After diving 15% mainly in this quarter we are asked to believe it will climb back 13% in the year that follows. Maybe. But here’s another theory. While we’ve been restricted in movement or without jobs we’ve become used to spending less (and used to flying less, and used to hanging onto our cars for longer and hanging on to the money we’ve got). Read more: How will the coronavirus recession compare with the worst in Australia's history?[8] My suspicion is that these behaviours can be learned, and we’ve been doing them long enough to learn them. During the global financial crisis we tightened our belts and then kept them tight for years, saving far more than the offical forecasts expected, in part because we had been shocked and felt certain about the future. A recovery that had been forecast to be V-shaped looked more like a flat-bottomed boat when graphed. It’s a picture I find more believable than a snapback. We are unlikley to get back where we would have been for a very long time.

Authors: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

Read more https://theconversation.com/the-reserve-bank-thinks-the-recovery-will-look-v-shaped-there-are-reasons-to-doubt-it-138213

Business Reports

Why Patagonia's purpose-driven business model is unlikely to spread

Patagonia has always sought to limit its environmental harm.Budrul Chukrut/SOPA Images/LightRocket via Getty ImagesPatagonia founder Yvon Chouinard, his wife, Malinda, and their two adult children no longer own the outdoor gear an...

Why does money exist?

Cash is pretty convenient.Dilok Klaisataporn/EyeEm via Getty ImagesCurious Kids is a series for children of all ages. If you have a question you’d like an expert to answer, send it to curiouskidsus@theconversation.com.Why do...

Castellum is among the first to receive NollCO2 certification

The Korsningen block project has now been completed, and Castellum is one of the first companies in the Nordics to receive a NollCO2 (ZeroCO2) certification. The Swedish Police Authority, the tenant in the project, has...

Minomic records breakthrough commercial sale in the US

Australian diagnostics company Minomic International Ltd (Minomic) is pleased to announce that their lead product, MiCheck® Prostate,1 has recorded its initial commercial sales in the US, the world’s largest healthcare mark...

Corporate Traveller and Rex Airlines partnership a game-changer for SMEs

In a move that demonstrates a strong and game-changing commitment to the Australian SME sector, Flight Centre Travel Group’s flagship SME business, Corporate Traveller, has partnered with Rex Airlines, Australia’s larges...

5 Ways to stay germ free on a plane

In pre-Covid days, no one gave much thought to their health when travelling, but nowadays, maintaining good hygiene while travelling has never been more important.  If you have ever had the misfortune of sitting on a plane and...

Web Busters - Break into local search

WebBusters.com.au