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Australia's fast COVID recovery leaves central bank nursing doubts

RBA wary of government focus on deficit as China looms and vaccines lag

One analyst told Nikkei Asia that the central bank is "genuinely worried that the government will start to consolidate the fiscal position prematurely" as the economy improves.   © Reuters

SYDNEY -- Over the last six months, Kris Botha has gone from despairing over heavy losses from coronavirus lockdowns to worrying about where to find more staff. Weekly takings at her beauty salon and spa business, about 100 km south of Melbourne, have bounced from as low as 500 Australian dollars during last July and August to a near-normal AU$8,000 to AU$10,000 now.

Demand has returned as more people visit her coastal town since they cannot travel overseas, and work-from-home has enabled some city residents to stay in the regional area.

"That's probably kept our business artificially high so far, but we don't know what it's going to be like in the longer term. JobKeeper is also finishing, so it will be interesting to see how things evolve," Botha said, referring to the government wage subsidy program she once counted on.

Botha's uncertainty about the future is shared by Australia's central bank, which argues the economy is a long way off from being 100% despite a slew of encouraging data. Trade tensions with China and a sluggish coronavirus vaccine rollout are among the reasons for pause.

The Reserve Bank of Australia on Tuesday kept its accommodative monetary policy unchanged, with Gov. Philip Lowe noting that the recovery is "stronger than had been expected" but warning that "wage and price pressures are subdued and are expected to remain so for some years."

Thousands of businesses across the country are indeed enjoying a sharp revival, thanks to a COVID-19 containment effort that has kept total cases below 30,000 and deaths under 1,000 since the pandemic began.

This has helped power the $1.5 trillion economy to two straight quarters of more than 3% growth, and the number of people in jobs is almost back to levels before the pandemic. The bellwether housing sector, too, is seeing a clear revival in demand.

But the RBA seems inclined to rein in the euphoria. In its most dovish policy stance in more than a decade, it has all but ruled out raising emergency-level, near-zero interest rates for at least another three years. It is also pumping AU$200 billion into the economy by purchasing government debt.

"The board is committed to maintaining highly supportive monetary conditions until its goals are achieved," Lowe said in his statement. He vowed not to raise the cash rate until inflation is "sustainably" within the 2-3% target range, requiring wage growth through "significant gains in employment and a return to a tight labor market."

He said the board "does not expect these conditions to be met until 2024 at the earliest."

The labor market is at the center of RBA's circumspect economic view, analysts say.

"They are genuinely worried that the government will start to consolidate the fiscal position prematurely," said Brendan Coates, a program director at the Grattan Institute, a public policy think tank. "Conventional policies are largely exhausted, so they are concerned they lack the tools to get the economy back to full employment."

Australia's economy slumped to its first recession after a record 29 years due to COVID-19 lockdowns last year, with the unemployment rate peaking at 7.5% in July. With most sectors reopening fully, that rate had dropped sharply to 5.8% by February.

Analysts believe falling unemployment will soon push the country's conservative government to refocus its efforts on reducing the budget deficit, an oath it abandoned in the wake of the pandemic.

Such a move could hamper the central bank's economic recovery efforts.

Already, the two bulwarks of Australia's economic rescue package -- the AU$100 billion JobKeeper wage subsidy scheme and the temporary increase in JobSeeker unemployment benefits -- wound down at the end of March. Economists estimate the two programs held the economy together through the pandemic shock and resulted in household wealth actually rising by 5%.

While most economists say the tapering of fiscal stimulus may not lead to widespread job losses, it will certainly slow down the strong employment growth seen since Australia lifted mobility restrictions.

Callam Pickering, Asia-Pacific economist at jobs listing site Indeed, reckons smaller Australian businesses could be more vulnerable with job losses concentrated among sole traders or enterprises with a handful of staff. It will also worsen the economy's persistent problem of anemic wage growth.

"Australian wage growth hasn't hit 3% in eight years and there is little evidence of wage pressures across any state or industry," Pickering said. "The Reserve Bank hasn't hit their inflation target in five years and the unemployment rate hasn't been 4.5% or lower in 12 years."

He added: "That highlights the record run of fairly tepid economic outcomes for Australia over the past decade and the challenge facing policymakers."

Kris Botha understands this situation well. Notwithstanding strong demand at the moment, she said any wage increases for her staff will have to wait for some more months, until she can gauge business levels during the lean winter period.

The RBA's challenge is likely heightened by other dark clouds on the economic horizon.

Australia's relationship with its biggest trading partner China has worsened over the past year, after Prime Minister Scott Morrison called for an international inquiry into the origins of COVID-19. Agricultural commodities have suffered the biggest collateral damage due to Chinese restrictions.

Figures from Australia's Department of Foreign Affairs and Trade last month showed trade between the two nations for the second half of 2020 was down 2% in value, but the numbers were largely propped up by China's booming demand for iron ore.

Excluding that commodity, the value of trade for almost all industries slid by 40%, as Beijing slapped tariffs on Australian wine and barley and blocked imports of seafood, cotton and coal.

Key sectors of Australia's migrant-fueled economy, such as tourism, higher education and housing rental market, have also suffered disproportionately from a near-total closure of international borders because of COVID.

Economists warn Australia's slow vaccine rollout will also have economic consequences in the medium term. The country has administered just over three vaccine doses per 100 people so far, compared to 54 for the U.K. and 49 in the U.S. Only 15% of the targeted 4 million vaccinations had been completed by March-end.

"Being able to return to pre-pandemic levels of output is very encouraging and speaks of Australia's success from a health and policy perspective," said RBC Capital Markets Chief Economist Su-Lin Ong.

"But to a large degree it masks some of the underlying issues that will return at some point -- lower productivity, high levels of household and government debt, and now thanks to COVID, much weaker population growth."

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