Economic recovery better than expected: RBA

by | Mar 3, 2021

Expectations of another sizeable economic growth result are expected when the quarterly national accounts are released this month, according to a recent report.

Despite the expectations, the Reserve Bank has left its key interest rates at record lows even though economists expect the December quarter national accounts will show the economy to have expanded by around 2.5 per cent, building on the sharp 3.3 per cent rebound three months earlier.

However, last year’s recession is expected to linger with the annual rate seen contracting by around 1.8 per cent, albeit a smaller negative than the central bank had been anticipating, according to the report.

After a recent board meeting, RBA Governor Philip Lowe said in a recent statement that the economic recovery is well under way and has been stronger than was earlier expected.

The meeting kept the cash rate, and rates on other key policy measures, at a record low of 0.1 per cent.

The board will not raise interest rates until inflation is sustainably between two and three per cent, something he does not expect to occur until 2024 at the earlier, Dr Lowe said in the report.

New quarterly international trade figures show that exports will be a drag on this month’s growth result, albeit a smaller than expected contraction of 0.1 percentage points. Overall, the quarterly trade surplus grew by a further $3.8 billion to $14.5 billion. It was the seventh consecutive surplus, according to recent data released by the Australian Bureau of Statistics.

Solid government spending joined recent positive results for consumer spending, home building and business investment figures. However, more up to date figures released recently showed approvals to build private houses dropped with a thump in January, tumbling 12.2 per cent to 12,125, following a record high in December as people rushed to secure the full benefit of the Federal Government’s HomeBuilder grant before it was reduced, according to the report.

However, approvals were still 38 per cent higher than a year earlier.

ABS Director of Construction Statistics, Daniel Rossi said the surge in HomeBuilder applications at the end of 2020, as well as the extension of the program to March, will continue to provide support for private house approvals in the coming months.

House prices in February rose at their fastest pace since 2003, while demand for home loans were equally rampant with mortgages granted to first home buyers over 70 per cent higher than 12 months ago. Overall building approvals fell 19.4 per cent in January, led by a 39.5 per cent slide in the more volatile “dwellings excluding houses” component, according to the report.

The start of the national COVID vaccine rollout has also proved a shot in the arm for confidence after an unsettled start to the year after the weekly ANZ-Roy Morgan consumer confidence index – a pointer to future household spending – rose one per cent, ending three weeks of consecutive declines.

ANZ head of Australian economics David Plank also said there was a further rise in consumer inflation expectations to 3.9 per cent, its highest level since last April.

Mr Plank said in the report that rising petrol prices, coupled with a strong housing market and the faster than expected recovery in the labour market could be fuelling inflation concerns.

“Inflation expectations are still below pre-pandemic levels, so could rise further without causing undue alarm for the RBA,” he said.