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Minutes of the Monetary Policy Meeting of the Reserve Bank Board

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International economic developments

Despite the rapid recovery in employment in Australia, members noted that wages growth domestically had slowed to a greater extent and had been more subdued than in other countries. In response to the pandemic, the labor market adjustment in Australia had principally taken the form of adjustment to hours worked and widespread wage restraint. In contrast, in some other countries, including the United States, the adjustment had mainly been through a decline in employment.

Members discussed cross-country differences in population growth stemming from international border closures. In some countries, including Canada, which had experienced high and rising rates of immigration in the years before the pandemic, population growth had slowed substantially. In New Zealand, some of the slowdowns in population growth had been mitigated by the return of expatriate New Zealand citizens during the pandemic; in turn, it was likely that this had contributed to the increase in housing demand in New Zealand.

The decline in population growth in Australia had been particularly steep relative to other countries; in the three months to September, the Australian population had declined for the first time in several decades due to a reversal in net overseas migration. However, in countries where net migration had contributed less to population growth in the years before the pandemic, including the United States, population trends had been little changed in recent quarters.

Members observed that corporate profitability during the pandemic had varied considerably across countries. The size and composition of fiscal support for the corporate sector had contributed much to this outcome. In the euro area and the United Kingdom, subsidy payments had not offset the effect on business profits of the decline in output. In Australia, business profits had increased in 2020 as production had fallen by less than elsewhere, and fiscal support had been targeted more towards wage subsidies than loan guarantees. The JobKeeper program had been particularly supportive of industries where labor costs comprise a high share of the total cost base.

Members discussed recent international developments by noting that the global economic outlook remained more favorable than a few months earlier. However, the near-term outlook had become more variable across countries. This partly reflected cross-country differences in infections and progress with vaccine rollouts.

The outlook for growth in the United States had improved, and inflation was expected to be a little higher due to the size and composition of fiscal stimulus there. While a more positive outlook in the United States would support global growth, the outlook for other advanced economies was less optimistic as the decline in output in 2020 had been more significant. The less fiscal stimulus had been provided, and some countries were still contending with lockdowns. As a result, substantial spare capacity was likely to persist in most advanced and emerging economies. In turn, this was likely to keep inflationary pressures well contained, despite the rebound in commodity and other input prices in recent months.

Domestic economic developments

Members noted that the strong recovery in the Australian economy had continued into 2021. The Australian economy grew by 3.1 percent in the December quarter, following the 3.4 percent rebound in the September quarter. This meant that GDP was around 1 percent below its December 2019 level at the end of 2020. Consumption had continued to recover in the December quarter despite a decline in household income.

Growth in business and dwelling investment had been more substantial than expected, supported by targeted fiscal measures. Exports had been supported by a sharp jump in rural production following the return of more favorable weather conditions. Public investment had increased in the December quarter, but by less than anticipated. Indications at the time of the meeting were that the rollout of public investment programs over the first half of 2021 would be slower than foreshadowed in state budgets. Overall, preliminary data suggested that GDP in the March quarter was likely to have recovered further to around its pre-pandemic level, earlier than previously expected.

Members discussed the unusual behavior of household disposable income during 2020. Growth in revenues had been robust in the June and September quarters of 2020, as fiscal transfers such as social assistance and subsidy payments had more than offset the labor and financial income declines. Part of this increase in household disposable income had been unwound in the December quarter. Further decreases were expected over the first half of 2021 as fiscal transfer payments and other temporary support measures expired.

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