Australian Markets Weekly: Large and persistent RBA forecast misses on growth

The Reserve Bank anticipates a strong rebound in GDP growth, with annual growth accelerating from 1.4% currently to 3.1% by end-2021.

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For the full picture, download the report: Australian Markets Weekly 2 December 2019

  • The Reserve Bank anticipates a strong rebound in GDP growth, with annual growth accelerating from 1.4% currently to 3.1% by end-2021.  Although it is natural to forecast a recovery after an economic slowdown, there is much uncertainty about the pace and degree of recovery, particularly given the Reserve Bank had earlier thought growth would be 3.5% by now, marking one of the largest misses in decades.
  • The Reserve Bank has persistently overestimated growth, with our testing suggesting that this is a structural problem rather than reflecting the inherent “noisiness” of GDP growth.  Overestimation has also become the norm since the global financial crisis at both a one- and two-year forecast horizon.
  • In our view, the problems with the Reserve Bank’s forecasts suggests that the bank is still grappling with the decline in potential growth, which is surprising considering that this structural shift has been discussed for years.  In the meantime, this leads us to downplay the Reserve Bank’s growth outlook given the bias in the estimates.

The week ahead – AU RBA on hold, Q3 GDP; RBNZ bank policy; US ISM and payrolls

  • The RBA is expected to keep the cash rate steady at 0.75% on Tuesday, while retaining an easing bias (market: 0.75%).  GDP is expected to be weak on Wednesday with a gain of 0.3%, which would put annual growth at 1.5% (market: 0.5%/1.7%).  For the GDP partials, NAB forecasts small contributions from net exports and public demand. NAB forecasts retail sales rose 0.4% in October (market: 0.3%).  In NZ, the RBNZ bank-capital policy announcement is Thursday and a trio of Q3 GDP partials is also due.
  • In the US, the November manufacturing ISM is expected to pick up to 49.5 given improvements in regional surveys, while the non-manufacturing ISM should be little changed at 54.5.  The November payrolls report should show faster jobs growth of 190k, with unemployment unchanged at a very low 3.6%.  US negotiators are expected to head to Beijing for trade talks.  In Europe, the 12 December UK election dominates.

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