Reserve Bank governor Philip Lowe believes the Australian economy could recover to pre-COVID levels quicker than he was expecting.
In a strong result, the national accounts showed the economy grew by 3.3 per cent in the September quarter, marking the end of the first recession in nearly 30 years.
However this still left annual growth in the negative territory of minus 3.8 per cent after the June quarter’s huge seven per cent contraction.
Dr Lowe told federal MPs before the release of the data he was hoping for growth of at least two per cent in the September quarter and expected solid growth in the December quarter as well.
“We have now turned the corner and a recovery is under way,” he told a House of Representatives economics committee on Wednesday.
Told during the hearing the economy had recovered 3.3 per cent in quarter, Dr Lowe said: “The positive GDP number … is good.”
The Reserve Bank is not expecting the growth rate to return to its pre-COVID levels until the end of 2021.
“If we keep getting numbers like that it will be a bit quicker,” Dr Lowe said.
Household spending was the main driving force behind the rebound, rising 7.9 per cent in the September quarter after the 12 per cent drop three months earlier and adding four percentage points to growth.
Conversely, international trade detracted 1.9 percentage points from growth, the largest detraction in 40 years.
Dr Lowe had told the hearing the economy was performing much better than the central bank expected when it last addressed the committee three months ago, and when he thought it would be lucky to see positive growth in the September quarter.
“Things have turned out to be much better,” he said.
“Employment growth has been stronger, retail has been stronger and the housing market has been more resilient.”
The Reserve Bank board left its suite of monetary policy measures unchanged at Tuesday’s monthly board meeting, having cut the cash rate, and other key rates, to a record low 0.1 per cent in October.
Dr Lowe reiterated that the cash rate is unlikely to rise for three years given the outlook for unemployment and inflation.
“I think we have got to get back to an unemployment rate of four point something to get the type of wage pressures that will deliver inflation outcomes consistent with 2.5 per cent,” Dr Lowe explained referring to the central bank’s two-three per cent inflation target.
“It’s going to take quite a long time.”
The central bank confirmed it had bought $19 billion of government bonds under its new $100 billion quantitative easing program, which aims at keeping market interest rates low and, in turn, borrowing costs down.
Dr Lowe said he had an “open mind” as to whether the program will extend beyond six months.
He said it will depend on the outlook for the economy – particularly employment – as well as what other central banks are doing and how financial markets are functioning.
On Australia’s strained relationship with number one trading partner China, Dr Lowe said this could have economic consequences.
However he said the Reserve Bank’s relationship with the People’s Bank of China remains “productive and constructive”.
“That relationship remains firm,” he said.