RBA warns of 'difficult days' to come for Australian economy

The Reserve Bank of Australia has warned of "difficult days ahead" but says the Australian economy will recover.

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The Reserve Bank of Australia (RBA) has warned of "difficult days ahead" but says the Australian economy will recover.

RBA Governor Dr Philip Lowe told the media yesterday that the next few months would be very difficult for the Australian economy, but once the virus was contained the economy would bounce back.

Big contractions in incomes and output 

Lowe said restrictions and uncertainty meant we are likely to experience the biggest contraction in national output and income seen since the 1930s.

The RBA is expecting national output to decline by around 10% in the first half of 2020, with most of the decline occurring in the June quarter. Unemployment could hit 10% by June, although Lowe is hopeful this figure could be lower if businesses can retain employees on lower hours. 

Inflation is also expected to decline significantly. Falling oil prices, free child care, and the deferral or decrease in some price increases will contribute. Inflation could potentially turn negative in the June quarter, which would be the first time since the 1990s. 

Share market performance mixed 

Economic data yet to come is likely to present a "very sobering picture of the economy" Lowe told the media. The share market, however, has already bounced back significantly from March lows, with the S&P/ASX 200 Index (ASX: XJO) up 15%. Nonetheless, it remains 27% down from its February high. 

The impact of coronavirus and associated restrictions on the share market have been uneven, with some companies suffering more than others.

ASX travel shares remain out of favour, with Flight Centre Travel Group Ltd (ASX: FLT) down 72% from February highs. Helloworld Travel Ltd (ASX: HLO) shares are down 68%, and Virgin Australia Holdings Ltd (ASX: VAH) has applied for voluntary administration

ASX consumer staples and healthcare shares have fared better. Coles Group Ltd (ASX: COL) shares are down just 7% from February highs, with Woolworths Group Ltd (ASX: WOW) shares down 17% and Metcash Limited (ASX: MTS) shares down 7%.

ASX healthcare shares with an interest in respiratory medicine have performed well, with ResMed Inc (ASX: RMD) shares down only 3% from February highs. Shares in Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) are up 7% from February highs. 

Recovery timing 

Lowe is confident the economy will bounce back, but said the timing and pace of the recovery would depend on how long restrictions remain in place.

If restrictions were relaxed mid-year, a recovery could be expected to begin from the September quarter. This could see GDP growth of 6% to 7% next year following a fall of around 6% this year. 

Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Helloworld Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended Flight Centre Travel Group Limited and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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