Australia’s central bank expects GDP to contract by 6%

People queue outside an Australian government welfare centre in Melbourne on March 23. (AFP pic)

SYDNEY: Australia’s central bank downgraded its outlook for the national economy on Friday and warned unemployment would stay high for several years as a second wave of coronavirus infections sent the city of Melbourne back into an extended lockdown.

Australia is facing its deepest contraction in about a century driven by the Covid-19 pandemic, though the economic shock has been less severe than first forecast.

The Reserve Bank of Australia (RBA) expects annual gross domestic product (GDP) to contract by 6% this year and then slowly recover over the next couple of years.

However, this recovery is now likely to be more protracted than first thought, with Melbourne in a total lockdown following a relentless surge in Covid-19 cases since June, RBA Assistant Governor Luci Ellis said during a webcast.

“The large persistent rise in case numbers in Victoria and the ensuing introduction of Stage Four restrictions there were not anticipated,” Ellis said in a speech after the release of the RBA’s quarterly economic outlook.

“This is not exactly a lesson for our earlier forecasts, but it does show how quickly things can change in a pandemic.”

Victoria state, of which Melbourne is the capital city, accounts for 30% of Australia’s national output.

The RBA expects the latest containment measures to subtract at least 2 percentage points from national growth in the current quarter.

The RBA forecast growth to pick up next year though the pace will be slower than first hoped.

The economy is seen expanding by 4% next year, down sharply from the RBA’s earlier prediction of 7%.

The RBA, on Friday, forecast GDP growth of 4% in 2022, lower than its previous projection of 5%.

“The recovery is expected to be slow and uneven, and GDP will probably take several years to return to the trend path expected prior to the virus outbreak,” Ellis said.

The dour outlook means the RBA would maintain its “accommodative approach” for as long as required, after slashing interest rates to a record low of 0.25% in an emergency meeting in March.

Australia is in a technical recession – defined by two consecutive quarters of contraction – for the first time since the early 1990s, having come out of the 2008/09 global financial crisis relatively unscathed.

A massive contraction in demand represents an “enormous shock” to the labour market, Ellis said.

“We expect that employment and total hours worked will decline over the next few months, partly because of the increased activity restrictions in Victoria,” Ellis said.