RBA under pressure to cut interest rates

RBA under pressure to cut interest rates

At the bank’s first meeting of the year at the start of February there was a lot of uncertainty around the virus and whether it would be contained within China with only a moderate impact on global supply chains.

The ASX200 shed 158.5 points or 2.3 per cent on Wednesday. It has now lost more than 6 per cent in value this week or $126 billion.

RBA governor Philip Lowe.Credit:AAP

The RBA believed the summer’s bushfires could cut growth by 0.2 percentage points through the December and March quarters while the virus was tipped to have double the impact. But the virus has now spread into key markets such as South Korea and Japan.

A string of Australian businesses are reporting trouble accessing supplies out of China while exports of key commodities including iron ore and coal have slipped.

In a bid to diversify away from China in the wake of the crisis, Trade Minister Simon Birmingham laid the ground for a new free trade deal with India on Wednesday.

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“From an Australian perspective, the near cessation in the movement of people out of China is having profound impacts on parts of our education and tourism sectors,” he said in a speech in Mumbai on Wednesday.

“A crash in Chinese consumption is flowing through into numerous premium agricultural products. Disruption to supply chains is impacting parts of our resources trade and, increasingly, many other parts of economic activity.”

He told Indian business leaders at the Asia Society event that they should avoid a temptation to look inwards while the global economy was under threat from the coronavirus.

“At times like these, it’s imperative that we don’t lose sight of the economic policies that have delivered the world far greater economic growth and human prosperity in recent decades,” he said.

Treasurer Josh Frydenberg and Prime Minister Scott Morrison have talked up the economy’s underlying strength ahead of the coronavirus outbreak.

‘Disruption to supply chains is impacting parts of our resources trade and, increasingly, many other parts of economic activity.’

Simon Birmingham, Trade Minister

But construction figures from the Australian Bureau of Statistics, released on Wednesday, showed that through the final three months of 2019 there was clear softness in the private sector.

Completed construction work in the December quarter fell by a worse-than-expected 3 per cent, with big falls in the residential and engineering sectors.

Westpac senior economist Andrew Hanlan said the construction sector represented 13 per cent of the economy. The 3 per cent drop in the quarter would have a “material direct impact” on the economy.

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UBS senior economist George Tharenou, who downgraded his forecast for the December quarter to just 0.4 per cent growth, said with the government signalling it was unlikely to support the economy the Reserve Bank would have to consider two interest rate cuts by August.

Asked if major crowd events such as the opening next month of the AFL season may have to be closed because of the virus, Health Minister Greg Hunt said it could not be ruled out.

“The possibility of events is always there, but that is a last resort,” he said.

Australia’s chief medial officer, Professor Brendan Murphy, said the spread of the virus into countries such as South Korea and Italy made it more difficult to prevent it entering into Australia.

“Obviously that presents a risk to spread to other countries. Our concern now is the number of countries outside China making it more likely we will have further outbreaks in Australia,” he said.

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra

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