The coronavirus outbreak could do more damage to the Australian economy than 2003’s Sars outbreak, governor of the Reserve Bank Philip Lowe has said.
Appearing before the House of Representatives economics committee in Canberra on Friday, Lowe said China’s economy was now much bigger and more integrated into the world economy.
“Our links with China are much more extensive than they were, the Chinese population is much more mobile than it was in 2003 and the Chinese economy in 2003 was growing very strongly.
“It took a hit of 2% in one quarter but bounced back quickly. Growth now is slower and the capacity to bounce back and have stimulus measures isn’t as great.”
He said the response of Chinese authorities in stopping people moving around China was also greater than during the Sars epidemic.
“So the interruption to normal life in China is much bigger than in Sars,” he said.
He agreed with committee chair, Liberal MP Tim Wilson, that coronavirus was likely to have a greater impact on the Australian economy than Sars.
He said the virus was spreading “extraordinarily fast”.
“Everyone is hoping to see that number come down quite quickly. If it does and the number of cases stabilises we could see a bounce-back.”
“We’re seeing at the moment the first order effect is on international students coming to Australia.”
He said the crisis was also affecting tourism and the supply chains of companies who import goods from China.
“The potential risk to the Australian economy I think is bigger than Sars and the truth is really none of us know how this is going to play out.”
Lowe said that while he felt the economy was gradually improving, it lacked “dynamism”, reflected in a lack of private sector investment.
This was needed to get wages moving again and inflation back up into the RBA’s target band of between 2% and 3%.
He said he did not have a “crystal ball” on the outlook for inflation, but assured committee members the central bank won’t be raising interest rates until inflation is consistently within the target band.
Inflation has consistently fallen short of the 2-3% target band, and is one factor why the cash rate is at a record low of 0.75%.
The consumer price index was 1.8% at the end of 2019.
“We will not be raising interest rates until we are very confident that inflation is sustainably in the two to three per cent range,” Lowe told the House of Representatives economic committee in Canberra on Friday.
Asked by committee chair and Liberal MP Tim Wilson whether he has a timeframe for this, the governor said: “I wish I could give you the answer … I don’t have a crystal ball.”
“I would like that to be sooner rather than later.”
On the flipside, Lowe told the committee negative interest rates are “extraordinarily unlikely”, while the need for other options, such as quantitative easing (QE), has not been reached.
“I do not expect it to be reached. So it is not on our agenda at the moment,” he said in his opening statement to the committee.
He reiterated that QE – where the central bank buys government bonds and other securities to pump money into the economy – would only be considered should the cash rate reach 0.25%.
The central bank remains upbeat about the economic outlook, predicting growth of 2.75% at the end of this year and 3% by end of 2021.
He expects the negative impact of the devastating bushfires and the outbreak of the coronavirus will be short-lived.
However, he said while the unemployment rate at 5.1% is reasonable, it is desirable to have it much lower.
“If you told me two or three years ago we would have employment growth averaging close to 2.5%, I would have thought the unemployment rate would be close to four now,” he said.
“The big surprise has been rising labour force participation. There’s been no shortage of jobs growth in Australia. In fact, it has been very strong. But it is being met with a lot of extra labour supply.”
He said that was not the case in the US, for example.