The RBA’s latest Statement on Monetary Policy is clear-eyed about the risks posed by repeat outbreaks of COVID-19, with any resurgence in virus cases likely to see broad activity restrictions reimposed.
“While these would be less severe than the extended lockdowns assumed in previous downside scenarios, an upswing in domestic case numbers would see activity restrictions tightened,” the RBA said.
“This would negatively affect confidence and weigh on private consumption and investment. In this scenario, the combination of activity restrictions and weaker confidence induces households to consume less and add further to their stock of accumulated savings.”
The Morrison government’s prediction that household spending will fuel the recovery also isn’t a sure bet, with the unwinding of fiscal support creating the possibility that shell-shocked savers won’t rush to spend the money that has accumulated on their balance sheets.
“The expected decline in income through to mid-year and a slowing in the recovery in labour markets could drag on the recovery in household consumption, as could a longer-lasting shift in risk preferences that results in the saving rate stabilising at a higher level,” the statement read.
That would see firms put off hiring decisions and lay off extra workers. In this scenario, the unemployment rate would peak at 6.75 per cent in mid-2021, and decline only slowly from there.
“It is also possible that if the unemployment rate were to decline more rapidly than expected, it might not be accompanied by stronger wage or price pressures if spare capacity is underestimated and wage and price inflation expectations become anchored at low levels,” the RBA said.
“Given the extent of private and public sector wage freezes, as well as the likelihood that wages growth and underlying inflation remain below 2 per cent for an extended period, low inflation expectations may persist.”
