have been smaller than we had expected in may. this seems to have been partly because the restrictions in australia didn't amount to a complete lockdown, and partly because they were lifted a bit earlier than expected. another reason for the smaller contraction was, as noted earlier, that fiscal transfers did a lot to replace lost income. this has helped sustain employment through periods of lockdown. it has also supported household consumption, which has recovered sooner than expected. a similar pattern has been evident in other advanced economies. second, while the part of the contraction directly attributable to initial health measures turned out to be smaller, general uncertainty and responses to weak demand seem to have accounted for more of the downturn in output and the labour market than earlier envisaged. this has been evident in the industry pattern of employment effects, as well as the weakness in investment intentions both in australia and abroad. after an initial rebound in payroll jobs in the most affected industries, the recovery in the labour market has been quite patchy. consequently we now think that, even though the initial contraction was smaller, the subsequent recovery is likely to be more protracted and progress on reducing unemployment will be slower. third, and related to the previous point, while the decline in total hours worked was smaller than we thought, it was tilted more to job losses rather than declines in average hours than expected ( graph 9 ; graph 6. 3 in the smp ). and more of the people who exited employment left the labour force entirely. this implies that there is more spare capacity in the labour market than a straight read of unemployment would suggest. graph 9 fourth, over the first half of the year, fiscal policy measures managed to keep aggregate household income broadly steady at the same time that household consumption contracted substantially. some households have therefore built up buffers of savings – intentionally or otherwise – that they would not normally have accumulated. similarly, recent withdrawals from superannuation could be used to tide some households over in a period of income loss. household incomes are forecast to decline later in the year when jobkeeper starts to taper off and the mutual obligation conditions for jobseeker are reimposed. but partly because of these accumulated savings, we do not expect this temporary setback to incomes to derail growth in household consumption. fifth, the large persistent rise in case numbers in victoria and the ensuing introduction of stage 4 restrictions there were not anticipated. this is not exactly a lesson for our earlier forecasts, but it

channels. 24 again, differences in economic structures, including household and corporate balance sheets, are likely to affect the relative strength of these transmission channels across economies. the savings / investment channel ( or intertemporal channel ) operates through the opportunity cost of borrowing ( or forgoing saving ) to finance new investments or fund consumption. because savings and investment behaviour should be guided by what the average ( real ) interest rate is likely to be over the life of the relevant asset or liability, the opportunity cost should not vary according to whether the interest rate on loans is fixed or variable. but fixed - rate lending may, in some cases, amplify or dampen the effect of monetary policy on some spending and investment decisions. for example, most existing us mortgage holders ( with long - term fixed rates ) were protected from the effect of rising interest rates from 2022 ( graph 13 ). but at the same time, it became unattractive for existing borrowers to move house because that would require them to refinance their loan at a much higher rate. 25 this adverse effect on housing turnover and the associated economic activity implies lower investment and consumption than otherwise in the united states. such a consideration is not relevant to australian borrowers on variable rate mortgages, though it is important to note that new housing investment is quite sensitive to changes in interest rates in australia. 26 graph 13 differences in industrial structures may also matter for the strength of the savings and investment channel. changes to interest rates can have strong effects on the demand for durable consumption and capital goods ( such as cars, furniture, electronics, or plant and equipment used by businesses ). this is because households and businesses have considerable discretion about the timing of those purchases. 27 in australia, production of durable goods is lower than in many other advanced economies ( graph 14 ). hence, more of any given change in the demand for durable goods in australia associated with a change in interest rates is reflected in a change in imports, with less of an effect on the demand for factors of production, like labour. instead, a larger share of australian production is accounted for by commodities, the demand for which is less sensitive to interest rates. r e s e r v e b a n k o f au s t r a l i a graph 14 there are aspects of other channels of monetary policy transmission that are likely to vary across economies. for example, the structure of household and business balance sheets can influence how responsive consumption and investment decisions are to asset prices