FX.co ★ Will the Australian economy take a U-shaped recovery pattern or a W-shaped pattern?

Economists are debating on the shape of economic recovery in Australia. Many forecast a U-shaped pattern, but most expect a W-shape. Nevertheless, both sides support the RBA's view that interest rates will remain low for a long time.

According to reports, the Reserve Bank of Australia intends to maintain interest rates at 0.25%. It will be announced at the scheduled meeting on Tuesday, at which Governor Philip Lowe will discuss plans for continued incentives.

"The shape of recovery will be primarily determined by consumer confidence," said Janu Chan, senior economist at St. George Bank. This suggests that recovery will take a U-shaped pattern. "Market participants believe that the economy will recover in a W-shaped pattern because of the heightened concerns on the second wave of coronavirus infections, as well as the cessation of key incentive measures."

An audience survey during the Bloomberg "Inside Track" webinar series also showed a similar gap. About 41% said that economic recovery in Australia will take a U-shaped pattern, while 34% answered a W-shaped pattern.

"Many businesses and households will not be supported for the second time. The government cannot be so generous," said RBA board member Ian Harper in a recent interview.

In March, within a few weeks after an emergency meeting, the RBA bought back more than $ 50 billion worth of government securities with different maturities to try to calm biased markets, as well as lower the cost of borrowing. But since the beginning of May, the bank has not bought anything else.

The RBA urges the government to continue stimulating support even when the program expires. The fear is that the economy could fail if some of these programs are not expanded.

"If for some reason the government did not stop stimulating, I think that we would not see a peak in unemployment," Harper said.

The unemployment rate in Australia has risen to 7.1% in May, and the Department of Treasury estimates that it will reach 8% this quarter.

In addition, according to a new report, the Australian economy will shrink by 3% this year.

Nevertheless, after the economic downturn, the economy is projected to grow by 5.3% in 2021-22, but it depends on the opening of borders.