Reserve Bank of Australia (RBA) governor Philip Lowe says the quicker everyone gets vaccinated the less economic damage we will incur, and the faster we can open up.
- The RBA governor says the economy will contract in coming months, due to the Delta outbreak
- He warns we are entering a tough period
- He says the faster everyone gets vaccinated, the less economic damage there will be
He said the outbreak of the Delta strain in New South Wales, and the impact of recent lockdowns in neighbouring states, would affect the national economy significantly in coming months.
Speaking to a parliamentary committee in Canberra on Friday, Dr Lowe warned we were entering a tough period, and economic activity was going to contract in the third quarter.
He said he could not rule out economic activity contracting for six months in a row, although he thought that was “unlikely” at this stage.
He said current RBA modelling assumed the damaging Delta variant of the virus would not be followed by “further variants that could cause similar episodes”, which explains why he thinks there won’t be six months of negative growth.
That could change, however.
Dr Lowe said it was very important for everyone to get vaccinated as quickly a possible, because that would reduce the amount of economic damage around the country and help to open up faster.
Asked if he was a strong supporter of encouraging people to get vaccinated, he said “100 per cent”.
“I’ve had my first shot of AstraZeneca, I’m getting my second one in two week’s time,” he said.
He said his deputy governor, Guy Debelle, had had both shots, and most of the senior staff at the RBA had had at least one shot of AZ.
But asked if he was optimistic about the economic outlook, he said he was optimistic about “next year”.
Inflation not a concern
On the topic of inflation, Dr Lowe said concerns about an outbreak in inflation seemed to have been imported from US political arguments.
He said it would not happen in Australia.
“It’s very difficult for me to see us having an inflation problem,” he said.
Recent data from the Bureau of Statistics show annual inflation is running at 3.8 per cent, which is above the RBA’s target band of 2 to 3 per cent, and well above the rate of recent years.
However, economists say the strong growth in inflation is largely temporary, and will likely fall again.
The jump in prices has occurred after the period of free childcare ended, and as fuel prices have rebounded from their record falls last year.
Dr Lowe said he was expecting inflation to be sitting sustainably above 2 per cent in 2023.
“Much of this discussion on inflation has come out of the United States, where earlier in the year there was an inflation concern,” he said.
“That concern was the result of continuing stimulus by the Federal Reserve and a very large fiscal stimulus on top of an already very large fiscal stimulus.
“Given that background, there were some investors who were concerned that we would return to higher rates of inflation, especially when you couple stimulatory policy settings with the supply interruptions we’ve seen in the global electronics market which has affected, in the United States, the car market as well.
“So the US was in a substantially different position to the one we’re in,” he said.
He was asked if he was concerned about higher inflation occurring in Australia.
“Not in Australia,” he said.
“In the US you could debate it either way, but I would observe that in the past month inflation concerns in the US have started to recede a bit.”
“In Australia … the fact that wages growth is likely to remain below 3 per cent for the next couple of years means it’s very difficult for me to see us having an inflation problem.
He said we would see a situation where the prices of specific commodities go up because of some disruption or shortage in a global supply chain, but it would not be enough to spark inflation nationally.
“Ultimately, here in Australia, it comes down to what’s happening in the labour market,” he said.
“With wage growth of 2-point something we’re not going to have an inflation problem.”
Wages, the labour market, and immigration
Dr Lowe was asked about his recent comments on immigration and its impact on wages and the labour market.
Andrew Leigh, the shadow assistant minister for Treasury, asked the governor what he thought of an idea from the Grattan Institute think tank.
The Grattan Institute has suggested reforming Australia’s immigration policy by changing the composition of the country’s permanent skilled migration intake.
It says we should consider preventing employers from importing labour from overseas unless they’re willing to pay those workers $80,000 a year or more.
It says that type of “wage-based selection model” would make it harder for wages to be suppressed because employers wouldn’t be able to entice foreign workers to Australia to work low-paying jobs with the promise of a pathway to permanent residency.
It said if the threshold was set at $80,000 a year (median full-time earnings), as you can see in the right-hand graph below, would dramatically change the profile of jobs available for workers from overseas.
It said the government should abolish occupation lists, which were cobbled together behind the scenes with little transparency.
Instead, the government should make any occupation eligible for employer-sponsorship as long as the sponsored wage was above the minimum threshold of $80,000 a year, it said.
Dr Leigh asked the governor if he thought there was merit in the idea.
But Dr Lowe said he wasn’t familiar enough with what a “wage-based selection model” would look like.
“To the extent that people who come to Australia bring skills that are in short supply, that’s to the national advantage,” he said.
“So how best to design a scheme where that happens effectively? That’s not my area of competence.”
However, Dr Lowe said he would like to get to the point where wages began rising, and he wanted unemployment and underemployment to come down.
He said the “best solution” to achieve that would be “strong aggregate demand.”
He said strong demand would draw people into the labour force who weren’t previously in the labour force, and it would boost hours for people who wanted more hours.
“That’s why we’re delivering all this monetary stimulus and we’ll continue to do so,” he said.