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Virus still casts shadow over recovery

·3-min read

The heads of both the Reserve Bank and Treasury have warned virus outbreaks remain a great source of uncertainty for the economic outlook.

Leaving the cash rate unchanged at a record low 0.1 per cent following Tuesday's monthly board meeting, RBA governor Philip Lowe said the economic recovery in Australia is stronger than earlier expected and is forecast to continue.

Economists expect Wednesday's national accounts will show the economy expanded by as much as two per cent in the March quarter, upgrading their predictions after a spread of new figures on Tuesday.

Prior to the data, forecasts centred on a 1.1 per cent increase for the quarter.

"An important ongoing source of uncertainty is the possibility of significant outbreaks of the virus, although this should diminish as more of the population is vaccinated," Dr Lowe said in a statement.

Treasury boss Steven Kennedy says the COVID-19 outbreak in Melbourne reinforces the point the pandemic is not over and as such there are heightened risks to Australia's recovery.

Victoria's seven-day lockdown has sent confidence reeling among Australians, a worry for retailers and the economy more broadly.

In its latest economic outlook, the Organisation for Economic Cooperation and Development expects Australia to enjoy strong 5.1 per cent growth in 2021, but warned this could be at risk if the COVID-19 vaccine is not widespread.

Dr Kennedy told a Senate hearing high vaccination rates reduced health risks, which is important for confidence more broadly in the community.

"If people feel the health situation is well managed, and part of that is the vaccination program, they will feel confident to go about their activity and that will be strong for the economy," he said.

The weekly ANZ-Roy Morgan consumer confidence index - a pointer to future household spending - dropped 2.5 per cent.

Confidence tumbled 3.8 per cent in Melbourne, while there were even bigger falls in Sydney (down 4.5 per cent) and Brisbane (down 4.7 per cent).

ANZ head of Australian economics David Plank said past surveys showed short lockdowns did not have a lasting impact on consumer sentiment.

"This offers the prospect that even an extension of the current lockdown may not have too dramatic an impact on consumer sentiment," Mr Plank said.

"Of course, the absence of JobKeeper for this episode means we need to be alert to worse results than the experience to date."

The JobKeeper wage subsidy scheme ended in March.

Meanwhile, the Australian Bureau of Statistics figures showed the current account trade surplus grew to a record $18.3 billion in the March quarter due to the strength of commodity prices, although export volumes increased only modestly.

"Import volumes also increased, which is a positive sign for domestic demand moving forward," BIS Oxford Economics senior economist Sean Langcake said.

The increase in imports was larger than exports, resulting in net exports subtracting 0.6 percentage points from growth in the quarter, albeit smaller than economists earlier predicted.

Business inventories - stock on shelves and in warehouses - were also larger than forecast for the quarter and will add around 0.8 percentage points to the growth result.

Separately, the manufacturing sector continues to grow in May, fuelled by strong construction figures, a pick-up in business investment and healthy demand from households.

"While the new Victorian lockdown will dampen enthusiasm somewhat, these conditions are likely to be setting the stage for a lift in investment by manufacturers," Ai Group chief executive Innes Willox said.

The Australian Industry Group performance of manufacturing index rose by a further 0.1 per cent in May to 61.8, an eighth consecutive month of recovery following last year's coronavirus restrictions.

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