Australia’s recovery from the COVID-19 pandemic is well under way, but there are two factors that could bring the economy unstuck.
Australia’s recovery from the COVID-19 pandemic is well under way, but there are two factors that could bring the economy unstuck.

Biggest risks to the Aussie economy

Australia's economic recovery from the COVID-19 pandemic is well under way and in some cases stronger than expected, but there are risks and signs of weakness, showing there's still a fair way to go to relative stability, central bank minutes suggest.

In minutes from the latest Reserve Bank of Australia meeting released on Tuesday, the board noted there had been strong growth in employment and a welcome decline in the unemployment rate, underpinned by Australia's success on the health front and very significant fiscal and monetary support.

"An important near-term issue was how households and businesses would adjust to the tapering of some fiscal support measures and to what extent they would use their stronger balance sheets to support spending," the central bank said.

"Members agreed that, while the recovery was expected to continue, the level of output remained noticeably below its pre-pandemic trajectory."

A far stronger than expected housing market has proved a boon for sellers. Picture: Brett Costello
A far stronger than expected housing market has proved a boon for sellers. Picture: Brett Costello

 

The RBA said its policy actions so far, including bond purchases, had been working broadly as expected, including lowering financing costs for borrowers, supporting the supply of credit.

But the board acknowledged the risks inherent in investors searching for yields in a low interest rate environment, including risks linked to higher asset prices, particularly in the housing market.

CoreLogic data released on Monday suggested the introduction of HomeBuilder may have skewed demand toward houses, with new home sales in the December quarter almost 100 per cent higher than in the same quarter of 2019.

High house prices have left plenty of Australians out in the cold. Picture: Matt Thomson
High house prices have left plenty of Australians out in the cold. Picture: Matt Thomson

A corresponding surge in house prices observed in recent months may pivot demand back to units, where prices are generally lower and housing affordability less challenging, the group says.

The RBA says it is keenly aware of the importance of closely monitoring such risks in asset markets.

It maintained the view that the cash rate would be maintained at the historic low rate of 0.1 per cent "for as long as necessary" and that a negative rate was "extraordinarily unlikely".

The RBA said it would not increase the cash rate until inflation was "sustainably" within the 2 to 3 per cent target range, which would require materially higher wages growth driven by significant gains in employment and a return to a tight labour market.

"The board does not expect these conditions to be met until 2024 at the earliest," the central bank said.

Originally published as Biggest risks to the Aussie economy



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