RBA outlines three scenarios for outlook

·2-min read

RESERVE BANK LOOKS AHEAD

In its latest quarterly statement on monetary policy, the Reserve Bank has laid out three possible scenarios for the economic outlook.

CENTRAL SCENARIO

Economic activity in Australia contracted sharply in the September quarter due to the Delta variant lockdowns. This setback has delayed but not derailed the economic recovery that was underway in the first half of the year. A rapid bounce back in domestic demand is forecast in the December and March quarters as restrictions are further eased. By mid-2022, the outlook is broadly in line with the pre-Delta recovery path. Under the central scenario, GDP is forecast to grow by around three per cent over 2021, 5.5 per cent over 2022, and 2.5 per cent over 2023.

UPSIDE SCENARIO

A stronger economic trajectory than the one envisaged in the central scenario is possible if households increase spending by more than expected. This could be the result of positive news on the health front and high rates of vaccination leading to reduced uncertainty about the outlook and a boost in households' desire to consume out of their rising wealth. These conditions would also support stronger private investment. In this upside scenario, the unemployment rate declines more rapidly than in the central scenario, to be around 3.25 per cent, and the stronger labour market sees underlying inflation increase to a little above three per cent by the end of 2023.

DOWNSIDE SCENARIO

A weaker trajectory could eventuate due to lingering uncertainty about the outlook, which results in near-term precautionary saving, alongside a bad health outcome, such as the emergence of a new variant of the virus or waning efficacy of vaccines in the first half of 2022. The weaker economic environment would depress confidence, resulting in lower consumption and higher saving by households, and a slower recovery in private investment. International travel would also resume more slowly, delaying the recovery in services trades. In this downside scenario, subdued activity pushes the unemployment rate to above pre-pandemic levels and drags on wages growth. This keeps underlying inflation below two per cent over most of the forecast period.

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