RBA deputy governor Guy Debelle warned that the global economy would be “materially weaker” and that it was difficult to assess the impact beyond the March quarter.
Speaking to business leaders on 11 March, Mr Debelle said the coronavirus outbreak had “significantly disrupted the momentum” of the economic turnaround the RBA had charted throughout last year but said that Australia was well prepared to weather the storm.
“The government has announced its intention to support jobs, incomes, small business and investment which will provide welcome support to the economy,” Mr Debelle said.
“The combined effect of fiscal and monetary policy will help us navigate a difficult period for the Australian economy. They will also help ensure the Australian economy is well placed to bounce back quickly once the virus is contained.”
However, the RBA still expects a hit of 0.5 per cent of GDP in the March quarter from losses in the tourism and education sectors.
“Clearly we are still only in the early weeks of March, so the picture can change from here,” Mr Debelle said.
“It is just too uncertain to assess the impact of the virus beyond the March quarter.”
The RBA also does not have a clear picture of the disruption to the Chinese economy. While Chinese production usually takes a hit over the Lunar New Year as workers take time off, that hit has obviously been more pronounced this time around.
“This year, the return to normal production has been significantly delayed,” Mr Debelle said.
“There was no ramp up in production after the holiday period, and we are now more than four weeks past the point where the Chinese economy is normally back to full-scale production. The straight arithmetic of losing a substantial amount of output over a period of several weeks implies a significant hit to economic activity.”
That could see the Chinese government unleash a substantial fiscal stimulus, driving demand for Australian commodities as it did during the GFC. Mr Debelle noted that coal and iron ore prices had remained steady in anticipation of a similar stimulus.
Mr Debelle also took the opportunity to defend the RBA’s successive rate cuts, the most recent of which took the rate to 0.50 per cent.
“Monetary policy still works,” Mr Debelle said.
“If you look at the reductions last year, they are transmitting through the economy pretty much the same as they ever had…we can’t do anything for the supply side of the economy, but we can help sustain demand higher than it otherwise would be through this period of disruption we have ahead of us.”