Reserve Bank governor Philip Lowe is expected to make an appeal for further policy reform over fresh fears business investment might not rebound after the COVID-19 crisisbecause of higher debt and a doubling in unemployment.
In a speech to be given on Tuesday afternoon Dr Lowe is expected to raise concerns that despite $340 billion in both government and central bank stimulus in the past month, business investment may not recover as hoped.
While seeking to calm the public on economic recovery, the central bank expects the coronavirus pandemic to reduce economic growth by up to 10 per cent, dragging confidence, consumer spending and new orders so low that businesses start cancelling existing and future investment plans.
Dr Lowe told the ABC's Four Corners on Monday night that "we're going to have a very significant economic contraction".
On Monday the Australian Bureau of Statistics estimated that at least 580,000 people had lost their jobs in less than a month because of the impact of COVID-19, while two-thirds of Australian businesses have already reported that turnover or cash flow had fallen.
Dr Lowe's concerns were first made to Prime Minister Scott Morrison and state and territory leaders at the national cabinet meeting last Thursday, and were designed to encourage a consensus between governments on genuine economic reform.
While Dr Lowe is likely to praise the government's $130 billion JobKeeper policy in his speech on Tuesday, the governor will return to his earlier calls for reform and for a consensus between governments to make that reform happen.
The central bank has since March 27 spent $46 billion buying federal and state government bonds, helping to make government debt incurred in the response to the COVID-19 crisis less expensive. The federal government is expected to issue more than $250 billion in new debt in the coming 15 months.
Treasurer Josh Frydenberg said on Monday that the central bank's views would continue to be respected.
"Their independence is guaranteed," Mr Frydenberg said, "The fact that they decided to come into the market in such a significant way at the height of this crisis indicated how seriously they took the economic impact of the coronavirus."
The RBA is also concerned that the traditional ways lower borrowing costs help the economy may not be working as usual. Lower rates usually lead to a depreciating Australian dollar, which stimulates the economy through cheaper exports.
With lower global demand because of COVID-19 shutdowns, especially in the tourism and education sectors, that currency mechanism is no longer as powerful.
The Australian dollar has lifted more than 10 per cent to US63.61¢ since the central bank cut the official cash rate to a record low 0.25 per cent and confirmed it would start buying government bonds through a program of quantitative easing.
Economists are warning that fiscal and monetary responses alone will not be enough to spark business investment, and that reform would now have to be taken seriously.
"We haven't had any consensus on reform, but maybe this sort of economic shock will lead to a new consensus," ANZ head of economics David Plank said.
"What government doesn't want to do is signal any raising of taxes or big spending cuts as that would only convince business and households to save."
Mr Frydenberg, Mr Morrison and Finance Minister Mathias Cormann have ruled out hiking taxes, including increasing the rate of the GST or the introduction of a coronavirus levy to pay down spiralling debt and deficits.
On Tuesday Dr Lowe will face questions on the specifics of where he expects further reform, something he has repeatedly left to governments to decide.
Industrial relations could be in the frame. Treasury has estimated that the unemployment rate will climb from the pre-pandemic level of 5.1 per cent recorded for February, to a peak of 10 per cent in the June quarter.
The ABS will also issue a new weekly update on wages and employment on Tuesday.
"We are doing everything to keep that formal connection between employer and employee," Mr Frydenberg said on Monday. "The JobKeeper package does that but we are also conscious that unemployment is on the rise and that is a function of the economic climate we find ourselves in."
Dr Lowe told the ABC TV’s Four Corners in a pre-recorded interview aired on Monday night that the government's initial response to expectations of higher unemployment may have been delayed due to the uncertainty on forecasts, and that he accepted restrictions could last for another six months.
"At the time, it's understandable they didn't go for a bigger package because we didn't appreciate just how big a risk this was to the economy," Dr Lowe said.
"At every step along the way [the Morrison government] outlined their thinking on each of the fiscal packages. There’s been incredibly strong co-ordination.
"We're going to have a very significant economic contraction. The magnitude of it is still hard to tell. If we need to have restrictions for six months to contain the virus, that's what we need to do."
JP Morgan's Ben Jarman said the central bank would likely hold back any new forecasts on Tuesday given the frequently changing economic environment.
"This suggests officials and staff are reluctant to give point forecasts until absolutely necessary. We have seen similar suppression of numbers from other central banks recently," Mr Jarman said.
The Big Four bank economists expect economic growth will contract on average 4 per cent over 2020. Westpac is the most bearish, expecting the economy to contract by 5 per cent through 2020, while Goldman Sachs expects a 6 per cent hit.
"Given this rapid deterioration in the outlook, we now estimate the Australian economy will contract 6 per cent in 2020 in annual average terms," Goldman Sachs chief economist Andrew Boak said.
Other economists expect the governor will seek to reassure the public that the massive and co-ordinated fiscal and monetary easing leave Australia relatively well-placed for recovery.
NAB's Kaixin Owyong said while Dr Lowe could discuss the bank’s unconventional policy, including additional detail on its bond-purchasing programme, he may also make a "renewed call for structural reform".