Transcript of Question & Answer Session The Economic Outlook

Thank you, Luci. That's a great summary of the Reserve Bank's thinking. So thanks very much for running through all those ideas and thank you also for agreeing to take questions. So we've had a couple of pop up in the Q&A box, and I've also had some questions sent to me separately. So I might actually start with a couple of those and one of them relates to the fiscal policy response that you just alluded to. So you would have seen obviously this morning, some announcements from the federal government about extension of JobKeeper, particularly for businesses in Victoria. I know the forecasts were finalised before that announcement, but have you got any thoughts on what sort of impact that may have on the near term profile of the economy?

Yes, sorry, the forecasts were finalised before last night's announcement – they were finalised after the Stage Four restrictions – so this does mean that the recovery will be a little stronger, hard to say exactly how much as yet. A lot of it really does depend on how quickly the Stage Four restrictions manage to be successful and how quickly we can step down in Victoria.

We still think that hours worked will probably decline, but employment won't decline as much as the forecasts that we published suggests. We still think that average hours worked will decline, in large part because a lot of people will be on JobKeeper. The more people on JobKeeper, the more people are being paid, but are on zero hours. So average hours worked will come down. That does imply that there's still quite a bit of spare capacity.

So yes, at the margin, the announcements last night do attenuate the weakness in the September and December quarters, but we still think it's a pretty weak outlook because the important point here is that the activity restrictions restrict activity and so you can't actually undo that with fiscal support. You can tide yourselves over, you can build a bridge to recovery, but you can't undo the necessary activity restrictions to stop the spread of the virus and nor should you try.

Thanks Luci. There's a question here from John Diller, a former colleague of mine here at Treasury. You mentioned the vaccine potential in your prepared comments, but John's question's about it sounds like you don't have any specific timing on a vaccine. It's sort of hopeful and …

I know a lot of people are working on the assumption that there will be a vaccine soon. Our forecasts are basically robust to there being no vaccine next year.

We're working on the assumption that even if a vaccine gets through stage three testing in the next little while, the global rollout of that takes some time. You've still got to manufacture it. You've still got to distribute it. And this is a global issue. It may sort of enable, you know, if it is distributed in Australia, it might mean that you're closer to the upside on terms of your domestic activity, but it's unlikely that you'd be able to open borders much earlier than what we've projected.

So we're not assuming that there's a vaccine anytime soon that if there is a vaccine approved soon, it would still take a while to come through. So we would think that's more something for 2022 profile rather than the near term.

Thank you. Here's one from Matthew Cranston from The Financial Review. How does the RBA think certain restrictions could be better applied or targeted to ensure that activity is not hit for the sake of incremental health benefits. That might be one bit of targeted to perhaps fiscal policy, but while you're here, I'm happy to hear your thoughts.

Look, activity restrictions and test trace quarantine are the things that get on top of this virus. You don't get a strong economy without getting a hold of this virus. I don't think that you can dismiss that as being some kind of trade off.

I think what we've seen around the world is that economies that have not had a good handle on the virus, but have not restricted activity, haven't really had any better economic performance than those that did a very quick lockdown. Very quickly getting on top of the virus is what will enable a strong recovery.

Thanks, Luci. Here's one from Su-Lin Ong, from RBC. Do you worry that confidence and especially business confidence will weaken and take longer to recover compared to earlier this year with longer term implications for investment activity, hiring and that it's adding to the fragile recovery?

We do worry about that and in fact, that's really that second lesson I talked about in my talk, that a bit less of the contraction has been because of the activity restrictions and a bit more of it has been because businesses pulled in their horns.

Now we've accounted for that effect in our forecasts already. Of course it could be worse. And it really is up to businesses to sort of take advantage of the fact that, you know, maybe some of the people they want to buy services from or buy equipment from are ready to take your call, and sell something to you.

So it really does come down to businesses being willing to take those risks and if they're feeling uncertain, if they're feeling worried about the future, if they're worried about the future economy, there is that risk that they'll pull their horns in, reduce investment even more than we have forecast, but we are forecasting a big reduction in investment.

And can I ask you a supplementary to that actually, because I know the Bank puts a lot of emphasis or I'm told that Bank puts a lot of emphasis on the NAB Business Survey, which clearly is monthly. What other information do you get, I know you have your Liaison Program where you talk to various businesses and others. Is that particularly useful now, given the NAB Survey is obviously a very good survey, but it's only monthly. Like how do you get those sort of intervening feedback from businesses, is it the Liaison Program?

Our Liaison Program has been absolutely instrumental in our understanding of this crisis and the feedback from our liaison partners in our Business Liaison Program has been invaluable. Yes, the NAB Survey and many other business surveys are useful. I think one of the lessons of this episode of the pandemic has been just how much people can integrate new sources of information into their traditional information set. But we've had a Business Liaison Program now for nearly 20 years and once again, it has really proven its usefulness in our understanding of what is happening.

Here's one from Michael Janda. What are the RBA's assumptions around government fiscal support, such as JobKeeper and JobSeeker coronavirus supplement? Do you assume they'll wind down as currently planned? I'll extend that question and say do you essentially have the same assumptions as the federal government?

Yes. We align our assumptions around the parameters of fiscal support to what has been most recently announced, so that was the July announcement. We don't try and second guess what they might announce later, including what they announced last night.

Indeed. Here's one from Nicki Hutley, from Deloitte Access Economics. Given the outlook for unemployment, are you concerned about the ability of the banks to continue to sustain delayed mortgage repayments?

It's a very good question, and I think it highlights one of the differences between a pandemic and a conventional downturn is that normally … In historical downturns and recessions, the financial sector is often at the centre of the causes. It's often a financial crisis or weakness in the financial sector that makes things more problematic or starts that downturn. This time around it's a health crisis. It's not a conventional economic downturn. And we go into this period with highly capitalised, profitable lenders and I think that really does suggest that there is a lot more sort of buffer to withstand and support the economy and support households and businesses through this difficult period than you would have seen in other downturns.

Thanks Luci. Here's one from Tapas Strickland at NAB. With trimmed inflation downgraded between 1-1.5% over the forecast horizon and the RBA effectively limiting what more it can do in the sense that the Governor has ruled out effectively negative interest rates, has the effective inflation target been lowered?

Thanks for the question, Tapas, it's an important point.

So firstly, as we mentioned in the statement on monetary policy and the Board in the Governor's media release on Tuesday, the Board hasn't ruled out doing more but it has ruled out doing things that it thinks will be counterproductive or not effective in the current circumstances. So we haven't completely ruled that out, you know, doing more. It is difficult …, there's a lot of uncertainty around these forecasts. And so certainly, our three scenarios do have inflation down below 2% over the horizon. We can't rule out that actually, you know, if things come back faster, so inflation pressures will also come back faster. We can't rule out that we have under done the supply side effects of this health crisis.

It is very different from your typical downturn. We do see there being a deficiency of demand and that's driving our inflation forecasts, but we can't allow that it's also more of a supply side than we're factoring in.

We haven't walked away from the inflation target. It's an important part of the way we frame our commitment in legislation to pursue the economic welfare of the people of Australia. But the medium term is the medium term, and maybe I think this is a lesson that the forecast horizon isn't necessarily the same time period over which we commit to getting back to above two because in a circumstance like this, where we've had the most enormous contraction in the economy and disruption to labour markets,. it may just take a little bit longer than you would expect in a more regular economic cycle.

Thanks Luci. Here's one from Leanne Taylor from Cbus. What is your view on the US economic cycle given they, on so much evidence, don't seem to have the virus under control. Did you want to make any specific comments about the US?

We don't publish country by country forecasts and we don't feel we can materially improve on what forecasters outside the building can do on some of these other countries, but it is fair to say that the lack of control over the virus and the difficulty in getting those health restrictions to stick and the difficulty in getting the spread of the virus to be contained in the United States is a serious worry. It really has been quite an exception relative to many other countries where you have seen a period where infection rates have come down a long way and stayed low. Obviously, the experience in Victoria shows that things can break out again. It's also happened in Japan, but the ability to get on top of this, even multiple times, is very different to what you've seen in the US.

So yeah, we are very worried that concerns about the virus will actually weigh on growth in the US for some time yet and of course, the connection between that and political tensions, is clearly front of mind.

Thanks Luci. There's a question here from Michael Potter, and I think it's been a common question that I receive as well. Are there any gaps in the real time data? You mentioned the Liaison Program is doing a great job, but are there any other gaps that the Reserve Bank would like to see addressed? Like I know the banks have got great data on card transactions and the like, and various governments have lots of data on mobility, and the like, is there anything else the Bank would really love to have to see what's going on?

I'm not sure I'm ready just to come up with a quick wish list. We always want more data and certainly, during this period, we have consumed datasets that we didn't previously consume.

The traditional ones still remain important. I think I'd like to give a shout out to the ABS and the Tax Office for making the payrolls numbers available. That has been really helpful in getting much nearer time understanding of the labour market. I think in this modern world – you know, we're doing this as a webcast – but there are so many sources of data that perhaps are a little bit untapped and I would encourage all businesses and all government agencies that might actually have a window on this. It might only be partial. I mean, certainly, each of the banks only has a partial lens into the economy and you've got to add them up to really get a representative view, but we learn a little bit from each of those datasets. Each of them is a tile in the mosaic and we put it together to try and make sense. So more is better, and I don't think I'd call that anything that I particularly feel is lacking. We put together a team to look at some of these new datasets and that's been really, really beneficial.

Fantastic. Thank you. Julie Toth has asked a question about productivity and the underlying problems with weak productivity in Australia. Do you think productivity growth actually will weaken further by the crisis and possibly get a much needed boost out of necessity on the alternative?

I think Julie, who I've known for a long time, has hit the nail on the head that it could go both ways. I think this is something that we really need to grapple with.

Everyone has gone home. This is only the second day I've been in the office since March and whole swathes of industries have discovered you can work productively from home. Others have found it's more difficult. The need for social distancing, cleaning, more security; these things are changing your cost base and changing the ease with which you have to do business. But on the other hand, people are focused on what's important, and whether that's your family or the activities that are really necessary for your business to thrive. I think these periods have created a lot of focus. So absolutely it could go both ways and I think this is one of the big questions we're going to be watching in the next little while.

Thanks Luci. There's one from Jo Masters at EY. Thank you for your comments. You've spoken about unemployment and inflation, but could you make some comments around the Reserve Bank's focus on financial stability and any concerns that might have emerged from the COVID recession?

Thanks. Obviously, this is the Statement on Monetary Policy and the Financial Stability Review will be released in September. So I don't really want to preview what's going to be in there.

What I would emphasise is this is a period of extreme contraction. There will be a lot of people who have lost income. There will be a lot of people who are struggling to get on top of their debts. On the other hand, there are people who are actually being supported through this with fiscal support and are using that opportunity to accumulate funds in their mortgage offset and redraw accounts, or get on top of some of the debts that they've gotten behind upon. One of the things we have heard in liaison is that for some people, this has actually been an opportunity to get ahead of where they'd been.

So we're very mindful of the diversity of experiences that we're seeing in the Australian economy at present. We're always mindful of financial stability risks, but as I mentioned earlier, we're coming into this period with a financial sector that is strong and is well capitalised and profitable, and is in much better shape to contribute to the support for the economy to build that bridge to recovery.

Thanks Luci. There's a question here from Sean Langcake, and I suppose it comes to the earlier comments about the inflation target, but can you give us the Bank's assessment of inflation expectations? And is there a material risk that the pandemic will entrench lower expectations for inflation?

It is certainly possible. On the other hand, I'm very mindful, at least for the household sector, there will be people who've been noticing that grocery prices have gone up. If you don't drive around much and you're not enjoying free child care, for you, your consumption basket may have gone up. We're very mindful of the diversity of experiences.

So I think it could go either way in terms of inflation expectations over the next little while. It's not a lay down misere that inflation expectations will decline, but the longer the decline in activity, the longer the period of high unemployment goes on, the longer the wage freezes and other measures are locked in, the more likely it is that inflation expectations will slow down.

Okay. There's one here from anonymous that I'll raise, Luci, about you mentioned China earlier on in your prepared comments. The trade data that came out this week, I think showed that China's taking nearly half of Australia's goods exports. That's great that China is growing so robustly relative to the rest of the world, but does that raise some concerns in the context of the comments around geopolitical risks that you mentioned?

I'm not sure I would connect it to geopolitical risk just at this stage. I think this is really telling you the story that China has recovered, as I mentioned, a little faster than we thought and that is, again, a testament to what is possible if you do get control over the virus and you are willing to do localised lockdowns, where necessary, to deal with outbreaks.

China has had a somewhat different recovery to some other countries because the nature of the support that they've provided has been more tilted towards their industrial sector than household income support. And so what you've seen is, more of a recovery in their production side, in their industrial side, than in the retail sales and the sort of things that you've seen elsewhere.

Their industrial sector and particularly, their infrastructure is very steel intensive. And what do you need to make steel? You need coal and iron ore. Iron ore prices have actually come up to almost as high as they've been since 2014. I mean, they're back at the levels they were after the Vale Dam disaster 18 months ago. This is a really big change and so revenues for iron ore will be much higher than what we would have thought even a couple of months ago and that's really what that's saying.

It's really telling you about the nature of their recovery. Yes, in the current environment with heightened geopolitical risks, there could be spill-overs from that, but at this stage, it's really telling you about the relative speed of recovery in different economies.

Thanks, Luci. There's one here from John Kehoe, Australian Financial Review, and it's on housing. House price falls seem to be accelerating and the situation in Victoria will worsen that. How much of a risk is a negative feedback from steeper falls in house prices, hitting wealth, consumption and confidence?

I think that is part of the dynamic that we're going to see in housing for the next little while. While you have activity restrictions, there are less transactions. People are concerned about their income, so they may be less inclined to jump into a new house purchase. And of course, as I mentioned in my talk, population growth is going to be a bit slower for a little while. On the other hand, there are going to be people who are starting to think that maybe they need a new home office and maybe they need to move to a bigger place.

So again, you know, there are complex human responses to this and I think it's important not to always see the economy through the lens of the established housing market. It's one important element of the economy, but it's not the only part. It is certainly something we're mindful of. And I think it's one of the reasons why … The fact that there are these potential for spill-over effects and sort of spirals of confidence is one of the reasons why it is so important for public policy to do as much as it can to support the economy through the period of activity restrictions and build that bridge to the recovery.

Thanks, Luci. We'll make this final question, it's from Michael Janda again. Does the RBA anticipate long term structural changes for the economy coming from the pandemic? For example, more remote working, greater flexibility and the like? Perhaps if I can extend that question and think, are there any real silver linings here that could enhance productivity in the longer term?

It's a really good question and it is one we've been grappling with. I'm reluctant to start talking about silver linings in one of the most incredible health crises and human tragedies that we've seen in a long time, and certainly, one of the most sudden. That said, it is true that a whole swathe of industries, as I earlier mentioned, have worked out that work from home is possible. Certainly, those conversations are happening here in the Bank where many people are thinking, ‘well, you know, as I come back to the office, I don't particularly feel a need to come in every day. I can be productive on certain days at home’.

On the other hand, I think there are strong tendencies to want to go back to normal. I think one of the things that will be slowest to come back is business travel now that, you know, doing conference calls at midnight is not pleasant, but it's better than flying to the other side of the world for a two day meeting.

And so you may find that there will be changed patterns of travel and movement of people around the world.

But I wouldn't underestimate the desire of people to go back to something like normal or what they thought was normal. So I think there will be some changes, but I'm always mindful that in any economic downturn people start sort of imagining that that was because of structural change or skills mismatch when in the end, it was just about a deficiency of demand.

The reason there are over a million people unemployed in Australia at the moment is not because they have the wrong skills. It is because of the activity restrictions, the deficiency of demand and the uncertainty weighing on household and business decisions. That's why it's important for public policy to support the economy through this period.

Thanks Luci. I think that's a great place to finish, so I will bring the event to a close now. So thank you again for your engagement and particularly for answering so many questions, there's obviously a lot of interest. It's very much appreciated by the Australian Business Economists and I'm sure, by our audience as well. I wish you and other senior members of the Reserve Bank all the very best in helping to navigate Australia through what is a pretty serious economic and health crisis, as you have indicated.

Thank you.