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Commonwealth Bank Economist: Australian Economic Outlook is Positive

Tuesday, December 29, 2020

Company: Commonwealth Bank of Australia

The economic and market outlook for Australia in 2021 is looking more positive, according to Commonwealth Bank’s chief economist Stephen Halmarick.

Mr Halmarick said while the spread of COVID-19 had undoubtedly had a significant impact on the Australian economy, financial markets, and monetary and fiscal policy, the implications have – pleasingly – been less severe than originally predicted.

“Australia has done a better job than just about any other nation in controlling the spread of the virus,” Mr Halmarick said. 

“This, combined with fiscal and monetary policy support being provided to the economy, and the role played by the Australian banking system, means the economic impact of COVID 19 has been less severe in Australia than many other nations, and less severe than initially expected.

“To be sure, Australia’s 30-year run without a recession has come to an end, and the human toll of the sharp rise in the unemployment rate has been very real. But, the outlook for Australia is improving.”

Mr Halmarick said one key consequence of the current health pandemic had been its impact on monetary policy.

“The recession, the rise in the unemployment rate, the global economic environment, and the expectation that inflation will remain below the 2 to 3 per cent target range for years, has seen monetary policy in Australia enter unconventional space for the very first time,” he said. 

“The cash rate target is expected to remain at just 0.1 per cent for at least three years. The RBA is funding the banking system for three years at 0.1 per cent, and the RBA is targeting the three year Commonwealth bond yield at 0.1 per cent. In addition, the RBA is now engaged in a quantitative easing (QE) program and will buy $A100 billion of Commonwealth and state government bonds over the six months to April 2021. This strategy provides the nexus between monetary policy and fiscal policy in Australia.

“The RBA Governor insists that the RBA is not financing the government directly, but the $A100 billion QE program will go a long way to supporting the Commonwealth and state governments borrowing programs for 2021 and likely beyond.

“Having entered the world of unconventional monetary policy, it is going to be a long time before the RBA can retreat from providing significant support to the economy.”

Looking ahead, Mr Halmarick said 2020 would likely be the weakest year for the global economy since World War two,  but 2021 is expected to be a better year.

“We do expect a solid recovery in 2021, with global growth forecasts at 5.2 per cent – led by the US and China,” he said.

“In the US, there remains a number of political risks ahead. But, assuming Joe Biden is sworn in as the 46th President of the United States on 20 January 2021, we expect him to focus on a few key policy priorities that should support the US economy throughout 2021 and beyond.”

Heading into 2021, Mr Halmarick said the key areas to watch would be the diplomatic relationship between Australia and China and its impact on our trade, as well as the effects of climate change and climate change policy on the Australian economy and financial markets.

 


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