Economics & Markets

Tax reform and big investment are on the table in Australia’s recovery period

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney Australia

The Reserve Bank governor, Philip Lowe, has released new growth forecasts for Australia as the COVID-19 fight continues. There are several levers policy makers could pull as we steer towards recovery and a new growth agenda.

Economic growth

The RBA expects a 10% decline in GDP over the March and June quarters. These forecasts are similar to our own, we are expecting a slightly larger decline of about 12% during that same period.

The central bank expects a recovery from the September quarter, meaning the new forecasts show a fall in GDP of around 6% in 2020 before a recovery of 6-7% in 2020. In our view, the recovery in 2021 will be a little lower than the RBA’s expectations.

Sources: ABS, AMP Capital
Sources: ABS, AMP Capital

In the governor’s update, he said the best way of dealing with the reverberations of the COVID-19 crisis is to “reinvigorate” the country’s growth and productivity agenda. The governor has, for many months prior to the pandemic, been calling on policy levers to be pulled to stimulate the national growth agenda.

Specifically, the governor said there is an opportunity for Australia to capitalise on its “cooperative spirit” to push forward with reforms which could serve to grow the economy.

Policy reforms that could be considered by Australian policymakers are anchored in topics the RBA has mentioned frequently in months gone past – including tax reform, how infrastructure is priced, training students and workers, and industrial relations.

In fact, the Prime Minister Scott Morrison has already flagged1 that company tax cuts may form part of the agenda for economic recovery. Although nothing is set in stone, tax cuts are a lever the government can pull to encourage business growth and investment.

The RBA also said it expects the unemployment rate to increase to around 10% in the June quarter, which is in line with our expectations. The central bank also expects hours worked to decline by 20% over the first half of the year.

We are more pessimistic on the recovery of the labour market and see the unemployment rate ending the year at 8.5% and average around 7.5% in 2021.

Sources: ABS, AMP Capital
Sources: ABS, AMP Capital

Full employment and inflation will guide the RBA’s assessment of the cash rate. The governor said the cash rate will not be increased until Australia makes substantial progress towards those targets.

You can read Governor Lowe’s full update here.

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Diana Mousina, Senior Economist
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