May 20, 2019

Australian Markets Weekly: RBA to signal rate cuts, more evidence of spare capacity

Shock election result sees the unexpected re-election of the Coalition government

For the full picture, download the report – Australian Markets Weekly 20 May 2019.


  • In a shock result, the Liberal/National Coalition won Saturday’s election with a roughly 0.5% swing on a 2-party preferred basis, confounding opinion polls and betting agencies that had long pointed to a change of government.  The Coalition may also be able to form majority government given that it currently holds 75 seats and is leading in 2 others (77 seats are required for a majority assuming the Coalition supplies the speaker of the house).  If the Coalition is unable to form a majority government, it would again rely on the support of independents.
  • In terms of policy priorities, the Coalition made relatively modest election promises during the campaign and the Treasurer has said that the focus will be on legislating the budget’s personal income tax cuts, so they can take effect on 1 July.  The larger tax cuts are some time off and we estimate that the cuts slated for 2019-20 equate to about 0.2% of GDP, or slightly less allowing for some leakage to imports.
  • The make-up of the Senate won’t be known for some time, but the Coalition will still have to negotiate with the minor parties and independents to secure the passage of legislation through parliament.

RBA expected to signal rate cuts

  • We recently brought forward the timing of our first rate cut from July to June and expect that the RBA will signal easier policy in Tuesday’s May Board minutes and Governor Lowe’s speech, which is entitled “The economic outlook and monetary policy”.  We think rate cuts are warranted given April labour force data provided more evidence that the economy was weaker than the RBA had expected, where the Board had emphasised that “a further improvement in the labour market was likely to be needed for inflation to be consistent with the target”.

Analysis –  More evidence of spare capacity

  • Recent data show the unemployment rate has risen over the past couple of months. With the RBA’s focus on the divergence between the strong labour market and weak GDP growth, it will be concerned that the labour market may finally be reflecting the earlier slowdown in activity.
  • With unemployment picking up, we found evidence of increased spare capacity from a range of indicators, namely: (1) the prime age unemployment rate; (2) underemployed workers; (3) the prevalence of second jobs; and (4) surveyed capacity utilisation.  In contrast, a smaller number of indicators pointed to capacity usage remaining tight, namely, (1) hours sought by unemployed/underemployed workers; and (2) surveyed skill shortages.
  • All this heightens our concern that inflation will continue to undershoot the Reserve Bank’s 2-3% target band, where we do not expect a return to the range until mid 2021.

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