Extreme Uncertainty' Causes RBA's Bright-Side Task to Slip - Economics Assignment Help

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Read the following edited article by Ross Gittens of the Sydney Morning Herald August 10, 2020 'Extreme uncertainty' causes RBA's bright-side mask to slip … The new forecasts the Reserve Bank issued on Friday were significantly different to those it issued three months ago. Worse, they laughed at Treasury’s forecasts in the economic update just two weeks earlier. The general story is that, thanks to the setback in Victoria, the upturn in the economy’s production (real gross domestic product) will now come later than expected, and be weaker. When Reserve governor Dr Philip Lowe says the recovery is “likely to be both uneven and bumpy” you can be confident he’s not exaggerating. “Uneven” means stronger in some states than others. “Bumpy” means not every post will be a winner. Reading between the lines, the lockdown's full contractionary effect on GDP was expected to come in the June quarter (for which we’ll see the figures in three weeks’ time), with the recovery starting in the present September quarter. The first quarter after the contraction should always be pretty strong (and, this time, particularly because the end of the lockdown meant people could get out, visit shops and restaurants and pubs), even if subsequent quarters aren’t as strong. This time last week, the smart money was expecting the recovery in the September quarter to be followed by a contraction in the December quarter, as demand was hit by the wind back in the JobKeeper wage subsidy and the JobSeeker supplement. Now, the September quarter recovery in the other states is likely to be overwhelmed by the effects of Victoria’s move to a harder lockdown. This, in turn, probably means there's less likely to be a further contraction in the December quarter – just continuing weakness. We do know that, in response to Victoria’s problems, Scott Morrison has modified JobKeeper at a cost of more than $15 billion. Friday’s statement on monetary policy acknowledged “extreme uncertainty” about the course of the pandemic and, hence, its economic effects. In response to this uncertainty, the Reserve has moved from a single set of forecasts to three scenarios: baseline, upside and downside. …. the baseline scenario assumes that the rate of infection subsides, the tightening of restrictions in Victoria succeeds, there are no new lockdowns elsewhere, and restrictions are eased progressively over the rest of the year. The upside scenario assumes the pace of decline in the number of cases is a bit faster than in the baseline, so the restrictions are eased a bit faster – like recent experience in the smaller states. People take more comfort from this and so confidence recovers faster than in the baseline. Households are thus willing to spend more of the savings they accumulated during the first half of this year, compared with what’s assumed in the baseline scenario.

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