Australia's Slowing Economy Jars With RBA Lowe's Optimism

(Bloomberg) -- Australia’s slowing economy and rising calls for interest-rate cuts are starting to erode central bank chief Philip Lowe’s optimistic outlook.

The economy experienced its weakest six-month period since the global financial crisis, Wednesday’s gross domestic product data showed, as tumbling property prices and a credit squeeze dragged on construction and consumer spending. The Aussie dollar slid to a two-month low as swaps traders priced in a reduction in interest rates by October.

The GDP result sets back the starting point for the Reserve Bank’s forecast economic growth of 3 percent, a level needed to keep unemployment grinding lower. Lowe’s 2-1/2 years at the helm have been marked by a disinclination to cut rates further and a belief that a sufficiently tight labor market will drive up wage growth and accelerate inflation back to target.

“Regardless of Lowe’s particular stamp on the governorship, we’d argue that the fundamental principles of monetary policy and cyclical management of the economy still apply,” said Sally Auld, senior strategist for interest rates at JPMorgan Chase & Co. in Sydney. “If the RBA board believes that the outlook for economic growth is no longer consistent with lower unemployment and higher inflation, then the case for rate cuts is uncontroversial.”

GDP Headline Data:

  • GDP rose 0.2 percent from the third quarter versus economists’ forecast of 0.3 percent; it advanced 2.3 percent from a year earlier, compared with a 2.6 percent estimate
  • Growth slowed to an annualized 1 percent in the second half of last year from 3.8 percent in the first

Auld swiftly changed her rate call to an easing in July and August following Wednesday’s GDP report, joining Westpac Banking Corp.’s Bill Evans and Nomura Holdings Inc.’s Andrew Ticehurst who also recently switched to calls for two cuts.

That jars with Lowe’s more optimistic view, expressed again in a speech in Sydney a couple of hours before GDP’s release, that the current record-low cash rate is “clearly stimulatory” and “is supporting the creation of jobs and progress towards achieving the inflation target.”

Australian three-year bond yields dropped by the most in a month, down 7 basis points to 1.59 percent. The country’s 10-year yields fell to 60 basis points below similar-dated Treasuries.

Economic Contradiction

Australia is in the midst of an economic contradiction: while growth has slowed sharply, firms keep steadily hiring and investing. The growing divide between the GDP and jobs reports -- with unemployment down to 5 percent -- was similarly noted by Lowe.

“Businesses are investing and they’re employing people,” the governor said following his speech. “The puzzle we’re grappling with at the moment is where’s the associated spending and output. ”

Lowe has rejected the argument that the discrepancy between employment and economic growth is because employment is a lagging indicator, pointing to record high job vacancies and RBA liaison with employers that supports a solid outlook for the labor market.

Australia's Slowing Economy Jars With RBA Lowe's Optimism

The RBA is homing in on household spending, which accounts for almost 60 percent of GDP. It’s remained subdued for the past two quarters amid signs that consumers are holding back in response to falling property prices and persistently weak wages.

Indeed, Wednesday’s report showed GDP per person has shrunk for two consecutive quarters, leading some commentators to say Australia is in a “per capita” recession.

The economy would have been in a worse position if not for public spending. Both national and state governments have opened their check-books as lower unemployment boosted the tax take. The building of roads, bridges and railways has supported growth.

Read More: Bloomberg Economics on Australia

Looming in the background is a budget next month and an election in May. The government is expected to shower tax cuts on the electorate to try to win over voters; meanwhile, recent history suggests that firms tend to hold off on hiring near elections.

©2019 Bloomberg L.P.