[HSC] Economist: 2–8 March
The week in review.
The release of the latest national accounts showed that the Australian economy grew by slightly more than expected in the last quarter of 2019. However, since then, the economy has suffered through a vicious bushfire season and is currently in the midst of the coronavirus pandemic, which is likely to get worse before it gets better. Consequently, the Reserve Bank voted to lower the cash rate t and the Federal Government is expected to announce a stimulus package in the next fortnight.
1. Economic Growth
The Australian economy expanded by 0.5 per cent in the December quarter of 2019, causing the annual rate of economic growth to increase from 1.7 to 2.2 per cent. Increases in household and government consumption along with business inventories contributed to the better-than-expected result.
However, the December quarter results do not include the impact of the bushfire crisis which plagued the eastern seaboard in early January. The effect of the bushfires is already being felt by retailers, who suffered through their worst December-January period on record. That, combined with the developing coronavirus pandemic are likely to cause the economy to contract in the March quarter, with an end to Australia’s recession-free streak in June a real possibility.
In response, the government is expected to unveil a multi-billion dollar stimulus package, which will likely focus on small business and large-scale infrastructure projects. Additionally, the Reserve Bank of Australia took the decision to lower the cash rate in an effort to support the struggling economy.
2. Monetary Policy
“At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak.”
This week’s Reserve Bank Board decision to lower the cash rate to 0.50% — a historical low — was a direct response to the unfolding coronavirus outbreak, which is expected to cause the Australian economy to contract in the March quarter. Thus far, the virus has had its largest impact upon the education and tourism sectors, but, the growing uncertainty surrounding the virus will have negative impacts upon all sectors of the economy.
However, the RBA forecasts, that once the virus is contained, the Australian economy should pick up, supported by low interest rates, infrastructure spending and a weak exchange rate. That being said, the domestic unemployment rate is currently 5.3 per cent, noticeably above the full-employment level. As a result of the spare capacity that exists in the labour market, wages growth remains subdued — currently 2.2% — and an uptick in wages is required for inflation to return to the centre point of the RBA’s target band.
Taking into account all of the above the information, the Reserve Bank concluded that a rate cut was necessary to support the economy and the market currently believes there to be a 73 per cent chance of a further rate cut — to 0.25 per cent — in April.
Further Reading
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
You can expect a new article every Sunday!
