The headquarters of Reserve Bank of Australia in Sydney. Associated Press
Australia’s central bank injected A$6.90 billion ($4.10 billion) into the financial system on Tuesday and bought A$4 billion in bonds as economists predicted a spike in unemployment and the worst recession in the country’s history due to the coronavirus.
The Reserve Bank of Australia (RBA) has flooded the system with nearly A$65 billion cash since March 12 when a liquidity crunch sent global markets into a tailspin. It has also purchased A$13 billion in government bonds since launching its “unlimited” quantitative easing programme on March 20.
Reserve Bank Governor Philip Lowe outlined the measures the bank will take to support an economy rocked by international travel restrictions, bans on large public gatherings and escalating unemployment in Sydney, on Thursday.
The RBA has so far been successful in flattening the yield curve as it aims to keep short-term yields around the cash rate of 0.25%.
A recession, the country’s first in nearly three decades, is still inevitable.
Westpac economist Bill Evans expects the unemployment rate to surge to 11.1% in the June quarter, up from his last week’s estimate of 7% and February’s official reading of 5.1%. He sees an economic contraction of 3.5% in that period. Citibank economist Josh Williamson predicted the A$2 trillion economy would shrink 1.2% in the current quarter and 5.7% next quarter, which would be the largest on record. Worryingly, the effects of the virus are likely to linger.
“We forecast a U-shaped, rather than a V-shaped recovery in economic activity,” Williamson added.
“Most importantly, we don’t see the economy producing quarterly output in dollar terms equal to the pre-coronavirus period until Q4 2021.”
The total number of coronavirus cases in Australia skyrocketed to almost 2,000 on Tuesday after the most populous state of New South Wales recorded its biggest daily leap.
Secondary data on Tuesday showed a sharp deterioration in services sector activity in March, underlining the hit from the coronavirus.
The CBA Services PMI fell to a record low of 39.8 as restaurants, cafes and tourism were hit hard by travel bans and cancellations of events and concerts.
A separate analysis of card spending data by Commonwealth Bank of Australia showed shopping outside of grocery, alcohol and healthcare was bleak.
And a weekly gauge of consumer confidence by ANZ-Roy Morgan plunged to a 30-year low of 72.2 points.
The government has responded to the crisis, with a stimulus package of A$66.1 billion on top of A$17.6 billion in support announced earlier this month though economists said a third package might be needed.
“Given the enormity of the current crisis, what we once would have called economic ‘stimulus’ will instead have to be large and permanent support for jobs, work and incomes, not temporary and targeted relief,” think tank the Australian Institute said.
“Australia’s economic response will need to take the form of a war effort: a public-led mobilisation of resources on a scale not witnessed in our lifetimes.”
Australia’s A$3 trillion ($1.72 trillion) pension industry was not consulted on the federal government’s decision to allow the unemployed and sole traders early access to retirement savings and is now in urgent talks about the move, sources said.
Prime Minister Scott Morrison and Treasurer Josh Frydenberg on Sunday revealed a A$66 billion fiscal stimulus package including measures allowing workers to take up to A$20,000 out of their superannuation savings over the next two years in response to the impact of the coronavirus crisis.
“We are disappointed that the government is not taking seriously enough obvious problems with the scheme’s design, such as the manual nature of the work required and the estimated volumes expected,” Industry Super Australia chief executive Bernie Dean told Reuters on Monday.
Talks between industry representatives, the government and the country’s top regulators on how the changes will affect the industry during a time of financial market upheaval only began on Monday, two sources with direct knowledge of the matter said.
Dean confirmed there was no consultation ahead of Sunday’s announcement between the government and the superannuation industry in Australia, which holds the world’s third-largest pool of pension assets, worth about $3 trillion at the end of the December quarter, as a result of laws requiring employers to contribute at least 9% of a worker’s salary to a pension.