The Forward View – Australia: February 2018

Cautious optimism, but much depends on wages and the consumer.

By

Overview:

  • Strength in the labour market, business activity and infrastructure spending are likely to support growth in 2018. We have revised up our real GDP growth forecasts moderately to 2.9% in 2018 and 2.8% in 2019 in annual average terms, suggesting an economy which manages to grow slightly above potential (~2.5%). Further gradual downward pressure on the unemployment rate to 5.1- 5.2% by late 2018 and into 2019  is forecast, even as the pace of job creation slows a little from the current rapid pace. This will follow downwardly revised growth outcome in Q4 2017, with our current forecast at 0.7% q/q – held back by a large subtraction from net exports, despite a better quarter for consumer spending.
  • This set of forecasts assumes that current financial market gyrations do not extend into a more sinister downtrend, or undermine the current synchronised upswing in global growth. Indeed, the upward revision to the Australian growth outlook is partly a nod to the improved global backdrop which will support Australia’s traded sectors (including services exports and niche manufacturing) despite the stronger than expected AUD, as well as some timing changes reflecting further delays in LNG exports hitting the market. Locally we are more confident in the investment and employment outlook with business conditions above long-run averages across a range of industries and geographies, and leading indicators from the NAB Business Survey such as capacity utilisation and reported difficulty in finding suitable labour rising.
  • The growth trajectory and the path of monetary policy will depend on the degree of improvement in wages and consumer spending, which are forecast to lift gradually. This remains a key difference between the RBA’s more upbeat growth forecasts of 3 – 3¼% in 2018 and 2019, although the RBA is highlighting the uncertainty surrounding the household/wages/inflation nexus. The housing market is unlikely to be supportive of consumer spending this year – any positive impact from the wealth effect will be eroded as house prices stabilise and decline moderately in some markets.
  • The RBA has indicated that it is in no rush to raise rates in lock-step with global central bank counterparts. However, lower unemployment, and evidence of wages growth moving upwards (even gradually) should be enough to give the RBA confidence that inflation will eventually lift above the bottom of the band. We continue to forecast two 25bp rate hikes in August and November, although acknowledge the risks are that these hikes could be delayed.  Also relevant here is the slowing in household credit and house prices – via macro-prudential measures –  which may help alleviate some concerns about household debt. A higher AUD may also threaten this outlook although our revised forecasts are for the currency to be USD0.75 by year end.

 

For further details, please see the attached document: