Both Treasury and the RBA are making a grave error if they think that things are starting to look up.
The RBA’s new baseline scenario isn’t what one would normally consider optimistic, with unemployment expected to soar to almost 10 per cent by the end of the year – a figure that would be unthinkable in less interesting times – and GDP growth at 4 per cent through 2021. But in 2020, they might as well be wearing rose-coloured glasses.
“The situation in Victoria will reduce growth in the September quarter and push out the recovery beyond that,” said RBA assistant governor Luci Ellis. “That said, activity is expected to continue to recover in much of the country over the rest of this year and next. 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.”
But what if the baseline is wrong? Forecasts are always best guesses, but best guesses aren’t effective when the fog of war is this thick. It took just one week for Treasurer Josh Frydenberg’s economic update to be rendered more or less moot by the situation in Victoria – a situation that allegedly began with a series of low-level quarantine and messaging failures and rapidly escalated into a new lockdown encompassing most of metropolitan Melbourne.
Compounding this is the fact that the upside scenario remains elusive. The RBA’s upside forecasts continue to depend on a vaccine as their saving grace, and although thousands of labs around the world are currently working towards one – motivated by profit as much as lofty humanitarian goals – the fact that meaningful GDP and employment growth are still walled off behind a hypothetical medical breakthrough is telling. So if the upside scenario is unlikely, and the baseline scenario is vulnerable to the sort of risks that have already knocked the recovery off course, that just leaves the downside scenario – a scenario which has so far hewn more closely to the Australian experience than most would like to admit.
“If the lifting of restrictions is delayed, the restrictions need to be reimposed or household and business confidence remains low, the outcomes would be even more challenging than those in the baseline scenario,” reads the RBA’s May statement on monetary policy. “For this scenario, we assume that many restrictions remain in place until closer to the end of 2020 and international travel restrictions are in place well into next year.”
Each new setback in Australia’s economic fortunes seems to bring a new assurance that everything is actually going to be okay, but the hard evidence suggests that’s not the case. With NSW just holding the line against COVID-19, and Australia now living in a “poorer, more dangerous” world, the downside scenario might provide a better baseline.