- Westpac slash GDP forecasts again

- RBA tipped to announce quantitative easing tomorrow

- AUD likely to remain under pressure over coming days

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Australian lender Westpac have today said they have lowered their forecasts for the Australian economy as a result of the coronavirus pandemic, as a result they now see a deeper recession occurring in 2020 than previously expected.

"We have revised our forecasts now seeing a deeper recession and a 7% unemployment rate," says Westpac Economist Bill Evans.

Expectations for a deeper-than-expected recession will likely have further implications for the Reserve Bank of Australia (RBA) which is expected to offer an aggressive response to the economic slowdown on Thursday when policy makers are tipped to announce another interest rate cut and the introduction of a quantitative easing programme.

The moves at the RBA, combined with the poor global investment environment, are likely to keep the Australian Dollar under pressure and allow the Pound-to-Australian Dollar exchange rate to cement its position above 2.0, at least for the short-term. The Australian-U.S. Dollar exchange rate has meanwhile dropped to 0.5933, which makes for the lowest level since April 2003.

Westpac have reviewed the Australian Government's A$17.6BN Stimulus Package announced last week and concluded that the Package would not be sufficiently stimulative to avert a recession in 2020.

An assumption has been made that a significant portion of the Package will actually be saved by its recipients and not spent, thereby denying the economy of any stimulus.

A $4.76BN payment will be made to pensioners and social security recipients, but Westpac say pensioners would save around 75% of payments and social security recipients would save around 60%.

"Pensioners are likely to be cautious given the collapse in bank deposit rates and health concerns. In that regard the 13.8% collapse in confidence amongst the over 65 year olds in the latest Westpac MI Consumer Sentiment Survey signals caution. Social security recipients will be unnerved by the COVID -19 threats and discouraged by the “one off” nature of the income boost," says Evans.

Westpac's revised forecasts of GDP growth in the second and third quarters of 2020, after adjusting for the Stimulus Package, are -0.7% and -0.3% respectively - a total contraction of 1% of GDP.

Last week economists at Westpac had said the Australian economy will contract by 0.3% in the second and third quarters; giving a first half 2020 slump of 0.6%.

This was built on a presumption that the coronavirus threat would peak in the June quarter and by quarter’s end confidence and activity would begin to recover.

Growth in the second half of 2020 was forecast to lift by 2.2%.

Since those estimates were issued Australia's response to the coronavirus pandemic has evolved, as has the response of the rest of the world.

"Most notably we have seen mandatory quarantine requirements for international travellers; restrictions on large public gatherings; a brutal sell off in the global equity markets; and reports of limited liquidity in government and corporate debt markets," says Evans.

Westpac are expecting a deeper shock to Australian businesses that would be most exposed to a retrenchment in consumer discretionary spending, particularly hotels, restaurants and cafes, recreational services and air travel.

This sector is now forecast to slump 40% over the two quarters from previous expectations for a 25% contraction.

Outbound and inbound tourism is forecast to contract by 80% over the two quarters.

The slowdown is, understandably, likely to translate into higher unemployment as the most at risk sectors shed jobs.

Westpac forecast the unemployment rate to reach 7% by October 2020, up from the previous estimate of 5.8%-6.0%.

RBA Action Likely

RBA Governor Lowe will speak at 05:00 GMT Thursday and is widely expected to follow other central banks by cutting the RBA's cash rate by 25bps to 0.25% and also announce a quantitative easing programme.

Quantitative easing involves the printing of money to buy government bonds, and in some circumstances, corporate bonds. The theory goes that the purchase of bonds allows the RBA to inject fresh money into the economy, thereby stimulating growth.

However, a side effect of this measure is that the yield on these bonds declines, thereby lowering the attractiveness of these assets to foreign investors.

This could therefore leave the Australian Dollar vulnerable to downside as foreign investor demand for Australian assts declines. Indeed, much of the Australian Dollar's decline over recent weeks could be laid at the door of expectations for quantitative easing to be introduced.

The RBA has stated that 0.25% is the floor for the cash rate and they would undertake quantitative easing rather than move to zero or a negative cash rate.

RBA Deputy Governor Guy Debelle last week hinted that the RBA will introduce 'yield curve control' (YCC) whereby the RBA seeks to control the yield paid by bonds, as opposed to setting an absolute target for the value of bonds to purchased.

By way of examples, the Bank of Japan targets the yield curve while the Bank of England has in the past set a limit of £435BN for its quantitative easing programme.

“If you’re thinking about trying to keep the front end of the risk-free curve low for a period of time then that’s more analogous to an interest-rate reduction,” Debelle said of potential operations in Australian bond markets. “It’s easier to think about it more in terms of the price sense than in the quantity sense.”

The RBA could therefore be intent on setting a target range on the yield curve to express their forward guidance rather than a target for bond buying.

"What part of the curve the RBA emphasises will influence the reaction in the Australian money markets and could impact the AUD," says John Nonan, an options and markets analyst at Thomson Reuters.

Noonan says Lowe will likely reiterate that there is just so much the RBA can do and stress the importance of the government introducing more fiscal easing in conjunction with the latest round of monetary easing.