CANBERRA, AAP – RESERVE BANK’S SCENARIOS

In its latest quarterly statement on monetary policy, the Reserve Bank has laid out three possible scenarios for the economic outlook.

CENTRAL SCENARIO

The RBA expects the economy to have grown by five per cent over 2021, and by around 4.25 per cent over 2022. The unemployment rate is forecast to decline gradually over the forecast period to 3.75 per cent by the end of 2023. Underlying inflation is forecast to increase further to 3.25 per cent by mid-2022, largely reflecting upstream cost pressures amid strong demand in housing construction and the durables goods sector. The drivers of inflation are anticipated to shift, with a steady pick-up in labour costs in response to strong labour market conditions forecast to sustain inflation in the top half of the two to three per cent target range.

UPSIDE SCENARIO

Stronger consumption driven by a swift resolution of the Omicron outbreak would provide a strong boost to confidence. The bulk of this effect is likely to be seen in stronger consumption. Households are also assumed to tap some of the savings accumulated during the pandemic to invest in housing renovations, which would further support dwelling investment. Stronger activity increases the demand for labour, pushing the unemployment rate down to three per cent by the end of the forecast period. Supply constraints would mean a sharper pick-up in near-term price pressures. Strong demand and a tight labour market would sees underlying inflation increase steadily to around 3.75 per cent by the end of the forecast period.

DOWNSIDE SCENARIO

A combination of heightened health-related risks following successive virus outbreaks and a major negative health event, such as the emergence of a new variant, would lead to slower growth. Both demand and supply would be negatively affected as a result of a more challenging health situation that leads to a temporary reintroduction of activity restrictions. In this scenario, households rein in their discretionary spending on services sharply, which weighs heavily on labour demand. As such, the unemployment rate remains in the 4.5-5 per cent range for the remainder of the forecast period, which places downward pressure on wages growth. Persistent weakness in labour market conditions would be sufficient to keep inflation in the bottom half of the target range for most of the forecast period.