Growth downgrade, taper delay in play

Ongoing lockdowns have caused HSBC economist Paul Bloxham to expect a sharper third-quarter downturn, then a gradual recovery as vaccination rates pick up. 

Bloxham also said given the weaker economic conditions, he expects the RBA to back away from its previous taper plans for September.   

The economist said economic conditions are decidedly worse than when the Reserve Bank of Australia’s board last met in early August. Lockdowns have been extended and are more widespread, and Covid case numbers have risen further. Over half of the nation's population is in lockdown, including the two largest states of New South Wales and Victoria. 

"There has been a significant shift in strategy in NSW and Victoria from an elimination approach to focusing on the vaccine rollout to allow re-opening, while most other states and territories are still pursuing elimination strategies,” he said. 

For NSW, the lockdown should be gradually lifted from mid-October, when vaccination rates hit 70 percent. At the current pace of the rollout, Bloxham thinks it will be December before every state reaches 70 percent.  

“However, our working assumption is that this threshold is unlikely to mean a full re-opening of state borders and periodic lockdowns will still be likely,” he said. 

Bloxham expects growth to stall in the second half of 2021. "However, extended lockdowns mean we now expect a sharper fall in GDP in the 2021 third quarter and do not expect a full bounce-back in the fourth," he added.  

“Unlike the RBA's central forecast from its 6 August statement, we do not expect a 'V-shaped' bounce in 4Q21.” 

Cash rate to hold steady 

As a result, the HSBC economist has lowered his 2021 GDP growth forecast to 3.5 percent, from 4.5 percent.  

Bloxham expects a recovery through 2022, but for this to be gradual. He said a shift in activity from the 2021 fourth quarter to the first half of 2022 will lift the year average forecast for 2022 to 2.5 percent (from 2.4 percent), which is still well below consensus and the RBA. 

The wage price index for the second quarter of 2021 was a surprise during the month, running at 1.7 percent year on year - well below the 3 to 4 four percent wage growth the RBA is aiming for. 

“Given much weaker economic conditions and weak wages growth, our central case is that the RBA decides to delay the tapering of its QE program, which is scheduled for September.  

“We expect the RBA to state, once again, that it does not expect its cash rate to be lifted until 2024 at the earliest.  

"We extend our cash rate forecast out to 2023 and expect the cash rate to remain at 0.10 percent." 

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