Australia looks set to experience an economic 'lost year' due to the pandemic, according to the Reserve Bank.

"GDP is now expected to have reached its pre-pandemic level in the March quarter 2021 and there were more people employed in March than before the pandemic," the RBA noted in its latest quarterly Statement on Monetary Policy.

As bad as that sounds, it is far better than many other nations, which the RBA said were unlikely to complete their economic recovery from COVID for at least another two years, and perhaps even longer.

In fact, per person, Australia's GDP is soon expected to be on a "higher trajectory" than before the pandemic, because the economic growth is being divided between fewer people than was previously expected, as borders remain largely closed to new arrivals.

Australia's rapid economic bounce back has caught policymakers completely off guard.

In its latest economic update, the Reserve Bank has been forced to jettison forecasts that were only three months old for a far more rosy outlook.

Rather than being up 8 per cent on June last year, Australia's economy is expected to be 9.25 per cent bigger than it was during the COVID trough by the middle of this year.

That has resulted in the forecast unemployment rate for June dropping from the 6.5 per cent predicted by the bank in February to just 5.25 per cent in its latest update.

That is below the current level of 5.6 per cent, and highlights the RBA's current thinking that the end of JobKeeper will have a "muted effect" on unemployment.

Three of the biggest changes in forecast are for the terms of trade (the price of our exports versus the cost of our imports), dwelling investment and business investment.

An iron ore price above $US200 a tonne for the first time is a key contributor to rising national income, while new home building has surged much more than the Reserve Bank's already positive forecast from three months ago, largely in response to HomeBuilder and the RBA's own monetary policies.

These factors, plus an increase in household consumption, are expected to cause annual business investment to turn positive by the middle of this year.

What will households do with their 'rainy day' money?

But the RBA said how quickly the post-COVID economic expansion progresses also depends largely on you.

As the federal government pumped tens of billions of dollars in support to households and businesses over the past year, through programs such as JobKeeper and the Coronavirus Supplement to JobSeeker, much of this money was stashed away.

In fact, the Reserve Bank expects that households were still spending around 1.5 per cent less during the March quarter than they did before the pandemic, despite the stimulus giving them higher disposable incomes.

However, over the next couple of years, if we spend those savings more quickly than history suggests, then the economy will be hotter and inflation will be above the bottom of the RBA's target range by mid-2023 and heading higher.

That is because this greater spending, and the business investment it would generate, would push unemployment to around 3.75 per cent by mid-2023, according to the RBA's 'upside' forecast.

Reading between the lines, that could be the catalyst for a rate rise slightly earlier than the bank's oft-repeated 'not before 2024' expectation.

However, if most households take 2020 as a cautionary experience and decide to pay down their debts and maintain a higher rate of saving, then the economic expansion would trundle along at a slower pace.

This 'downside' scenario would see unemployment stuck roughly where it was in the period before the pandemic, around 5.25-5.5 per cent, weighing on wages growth.

That, in turn, would leave inflation still well below the RBA's target by the end of its forecast period in mid-2023.

That could see interest rates stay at record lows beyond 2024, and might prompt further unconventional monetary policies from the central bank to try and tempt more of us to borrow and spend rather than save.

Population and COVID outbreaks also key to forecasts

Another key uncertainty around the forecasts is immigration.

The Reserve Bank is basing its forecasts on the assumption that Australia's vaccine rollout accelerates in the second half of this year, enabling borders to be reopened gradually from early 2022.

Population growth is expected to be around 0.2 per cent in 2021, the slowest rate in more than a century.

The Reserve Bank has noted that Australia's faster population growth has been "a key reason why the rate of economic growth in Australia had exceeded that in many other advanced economies at that time."

However, while the lack of new arrivals will continue to dent Australia's headline economic growth rate, it is boosting growth per capita, or per person.

In particular, the longer it takes to reopen borders to groups beyond returning citizens and permanent residents, the more likely workers will see faster pay rises than they have for many years.

"Given the current domestic availability of labour, strengthening labour demand as the economy transitions from recovery to expansion is likely to be able to be met from within the domestic population in the near term," the RBA noted in its report.

"However, a sustained period of economic recovery could lead to wages pressures emerging more quickly if new labour supply remains constrained, particularly and foremost in areas of domestic skills shortages and where substantial time is involved in upskilling domestic workers."

While that will boost incomes, it will also likely push up inflation and may result in interest rate rises earlier than the Reserve Bank currently expects, which is not before 2024.

The forecasts also assume no further large COVID outbreaks, of the Victorian kind, and that any future restrictions on movement and activity are limited and brief.

It is an assumption Sydneysiders currently hope proves correct, but as Yogi Berra famously said, "it's hard to make predictions, especially about the future."

And it has never been harder for economists than during the current pandemic.