RBA’s Heath Says Virus Is ‘Serious Downside Risk’ to Growth

Michael Heath

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Australia’s tourism and education sectors are key industries in the firing line of the coronavirus epidemic, and the central bank’s latest forecasts have not incorporated supply chain disruptions, a senior official said.

“That’s something we’ll need to keep watching and there’s serious downside risk,” Alexandra Heath, head of economic analysis at the Reserve Bank, said in Sydney Wednesday in reference to the coronavirus. “I don’t think we can say that it is just a quarterly shock that then everything goes back to normal.”

Responding to a question on whether the RBA would need to take policy action if the epidemic triggers a fall in output in China and Australia, she said it was difficult to say because there are so many moving parts.

Australia is already reeling from the impact of drought and wildfires that devastated the east coast and left major cities choking on smoke. This is set to cut farm output and consumption in the near-term, but reconstruction work and other recovery efforts will subsequently boost economic growth later this year.

Heath said the coronavirus is in a different league to the bushfire shock.

From a forecasting perspective, Heath said the difficulty is not knowing how long the disruption will run. The bank’s latest economic forecasts, released Friday, only included first-round effects from travel disruptions that were known at the time, she added.

Australia has barred flights from China and there is speculation this would be extended, threatening chaos as it coincides with the beginning of the university academic year.

“Something that we don’t have in here, and is a very serious downside risk to the forecasts, is that we haven’t really taken into account that China sits in the middle of a lot of supply chains,” Heath said.

“It’s starting to look a lot like the disruptions and these sort of supply chain spillovers are going to be a lot more serious than what we have,” she said. “We’re going to have to think through how much of it is supply and therefore have a supply shock effect on output, and prices in particular.”

The bank predicts Australia’s economic growth will accelerate to 2.75% by the end of this year, from around 2% in 2019, and climb to 3% in 2021. It kept interest rates unchanged at its first meeting of the year last week, having cut three times to a record-low 0.75% between June and October.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Alexandra Veroude, Malcolm Scott

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