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

How to Deal With An HMRC Enquiry?

If you get that morning call or letter from the HMRC that they would like to investigate your tax position, you will most likely panic. You will not know what awaits you if this is your first time facing a tax investigation by H...

Why some are rich, others are poor – and what it means for future prosperity

What makes a nation wealthy?Getty ImagesWhy are some nations rich and others poor? Can the governments of poor nations do something to ensure that their nations become rich? These sorts of questions have long fascinated public off...

Creating my own space in the start-up tech industry

When I ventured out to launch a start-up targeting mums, I knew it wasn’t going to be easy. In a field that is heavily male-dominated, the gender funding gap is ever-present, with some suggesting the issue stems from bias that...

Australian CEO reaches record breaking donation goal

Leading Australian entrepreneur and philanthropist Chris Christofi has achieved his ambitious record-breaking goal to raise $250,000 for people experiencing homelessness, following the Vinnies CEO Sleepout which took place at th...

Biden says it will provide ‘a little bit of relief’ – but experts say even that may be a stretch

Gas prices are at record highs. AP Photo/Gene J. PuskarPresident Joe Biden called on Congress to suspend the federal gas tax to “bring families just a little bit of relief” as average gasoline prices exceed US$5 a gall...

Yes, fireworks prices are skyrocketing, but there should be plenty of bottle rockets and sparklers for you and your family this Fourth of July

Many cities, such as New York, returned to hosting big public displays in 2021 after skipping 2020 due to the pandemic. AP Photo/John MinchilloIf you’re looking forward to shooting off bottle rockets and Roman candles this F...



NewsServices.com

Content & Technology Connecting Global Audiences

More Information - Less Opinion