RBA Slashes Near-Term Growth Outlook as Jobs Key to Rate Cut
Australia’s central bank slashed its near-term economic growth outlook and is relying on persistent hiring strength to cushion a property-driven downturn in household spending.
The economy is expected to expand 1.75% in the year through June versus 2.5% seen three months earlier, and is then forecast to lift to 2.75% -- its estimated speed limit -- for the rest of the forecast period, the Reserve Bank said in Sydney Friday. It made swingeing cuts to the outlook for consumption and dwelling investment even after incorporating current market expectations of two interest-rate cuts in its forecasts.
“Growth in the Australian economy has slowed and inflation remains low,” the RBA said in its quarterly Statement on Monetary Policy. “Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction. Despite this, the labor market is performing reasonably well, with the unemployment rate steady.”
Click here for a summary of the RBA’s growth and inflation forecasts
The central bank opted against easing policy Tuesday as it waits to see whether the persistenthiring strength of the past two years is maintained. It signaled full employment is likely lower than in the past, saying the jobless rate can fall further than the current 5% without setting off consumer-price growth. The message: unemployment needs to fall to avert an easing.
“At its recent meeting, the board focused on the implications of the low inflation outcomes for the economic outlook,” the RBA said. Core inflation is “expected to remain low in coming quarters, largely because the weakness in housing- related items is expected to persist for a while.”
The Australian dollar was little changed after the release, overshadowed by cautious optimism over the outlook for U.S.-China trade talks.
Sally Auld, a senior strategist for interest rates at JPMorgan Chase & Co. in Sydney, said the statement makes clear that looser monetary policy “is a question of when, not if.”
“The RBA has chosen to make downgrades to its forecasts that preserve the narrative of trend growth and a gradual return to target-consistent inflation despite mounting evidence that growth is tracking below trend and the rate of core inflation has decelerated over the past year,” she said. “What makes the forecast set a little easier to swallow is the fact that the forecasts are based on current market pricing; that is, 50 basis points of easing.”
The RBA offered some prospect of improvement for the financial position of households, noting cash rebates from the government are in the pipeline. While the opposition Labor party is leading in opinion polls ahead of next weekend’s election, it’s offering similar stimulus to lower income earners.
“Household disposable income growth is also expected to be supported by lower net interest payable owing to the lower cash rate assumption,” it said. Australians could do with a boost given they’re laboring under record debt with stagnant real wage growth.
The central bank has kept its cash rate at a record-low 1.5% since August 2016 and noted in today’s release that money markets are pricing in quarter-point cuts this year and next.
In its statement, the RBA lowered its household spending forecast in the year through June to 1.6% from 2.2%; it predicted dwelling investment would slump 6% in the period versus a 1.7% drop seen three months ago. Household spending accounts for 60% of GDP and the bank noted that uncertainty around its outlook is a key risk to the economy.
Offshore, the bank highlighted trade tensions between the U.S. and China, which is also Australia’s biggest trading partner.
“The global growth outlook has been revised slightly lower and the risks remain tilted to the downside,” the RBA said.
“The outlook for China continues to be an important source of uncertainty for the external environment facing Australia’s economy. The Chinese authorities face significant policy trade-offs and it is unclear how various policy changes will play out,” it said.
©2019 Bloomberg L.P.