RBA to Keep Stimulus Levers Steady Ahead of Crucial GDP Report

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RBA to Keep Stimulus Levers Steady Ahead of Crucial GDP Report
Credit: © Reuters.

(Bloomberg) -- Australia’s central bank will keep the stimulus flowing when it meets Tuesday, a day before data that will reveal whether a record recession-free run is drawing to a close.

Reserve Bank of Australia Governor Philip Lowe is expected to keep both the cash rate and three-year bond yield target unchanged at 0.25%. The bank only bought government securities on two days in May as markets settled and borrowing costs fell. The question now is whether a recession will be avoided.

Australia’s economy is emerging from hibernation as governments begin relaxing lockdown restrictions. The RBA sees GDP shrinking 10% in the first half of this year, with most of that concentrated in the current quarter. Data Wednesday will unveil whether the economy could avoid two consecutive quarters of contraction -- the technical definition of a recession.

“Australia might just do it again,” said Phil Odonaghoe, an economist at Deutsche Bank AG (NYSE: DB ), who expects 0.1% growth in the first three months of 2020.

For Lowe, whether or not a technical recession occurs is probably just a sideshow. He’s focused on reversing the almost 600,000 jobs lost in April alone and restoring household and business sentiment.

“With the national health outcomes better than earlier feared, it is possible that the economic downturn will not be as severe as earlier thought,” Lowe told a parliamentary panel Thursday. “Much depends on how quickly confidence can be restored.”

The drop in confidence has firms scaling back expenses. The RBA, in its updated quarterly outlook released in May, said many firms had deferred or canceled investment plans.

“The COVID-19 outbreak and the associated shutdown of the economy has created huge uncertainties,” said Diana Mousina, senior economist at AMP (OTC: AMLTF ) Capital. “The good news is that the economy is coming out of hibernation earlier than anticipated.”

By contrast, construction activity data has shown little signs of disruption to the work already in the pipeline in the first quarter. Private sector engineering and non-residential building both advanced in the first three months of 2020.

Economists are waiting for inventories and net exports figures released Tuesday to finalize their forecasts ahead of the GDP report on Wednesday. With the economy certain to go backwards in the current quarter, a negative reading for the first three months of the year would make a technical recession all but inevitable.

Australia last recorded a recession in the first two quarters of 1991 and is in the longest streak of expansion in the post-World War II era. If the economy manages to eke out an expansion in the first quarter, the record will likely continue, given the massive fiscal injection and the success in containing the virus expected to boost activity in the third.

“We’re tracking between the baseline and the upside,” Lowe said of where the economy stands in terms of the RBA’s three scenarios. “I wouldn’t be prepared to say we’re on the upside yet -- the recent data have been better than expected, but I still see a lot of challenges coming down the track.”

©2020 Bloomberg L.P.

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