The economy is expected to bounce back to pre-COVID levels by the end of 2021, with growth tipped to rebound strongly as the RBA considers further bond buying, a global fund manager has predicted.
Janus Henderson Investors’ Australian fixed-interest investment strategist Frank Uhlenbruch said while new COVID outbreaks in Sydney and Melbourne over Christmas were concerning, they were unlikely to dampen growth prospects as the country continued to recover from the crisis and vaccines were rolled out.
“It appears aggressive fiscal and monetary measures have limited the damage caused by public health measures and helped boost business and consumer confidence,” Mr Uhlenbruch said.
“We still look for the Australian economy to rebound by around 5% over 2021, though the latest outbreaks and reintroduction of state border controls have increased downside risks.”
Mr Uhlenbruch added that the fund manager expected the economy to reach end-2019 levels in late 2021, as the “slack” built up in terms of unemployment and wage suppression would take a number of months to recoup.
“The economy will have built up considerable slack and this will continue to show up in an elevated unemployment rate, low rate of wages growth and inflation rate below the RBA’s 2% to 3% target band,” he said.
“With the cash rate now at 0.10% and the RBA reluctant to move into a negative rate regime, further easing, if needed, is likely to come in quantitative form.”
Mr Uhlenbruch suggested the Reserve Bank could look to buy up to $100 billion in government and semi-government bonds over the next six months.
He warned that the “low risk-free interest rate regime” would persist for at least two more years, meaning demand for income-producing assets would remain high.
“The preconditions for a shift in accommodative [monetary] policy remain ‘outcome’ based. Fiscal policy will move from accommodation to consolidation only when the unemployment rate falls below 6%,” Mr Uhlenbruch said.
“Monetary conditions will only normalise when actual inflation is sustainably in the 2% to 3% RBA target band and the labour market is at full employment.”