The Forward View – Australia: September 2017

RBA to remove some emergency accommodation in 2018.

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Overview:

  • Stronger employment, GDP and investment data have seen us revise our forecasts lower for unemployment, and slightly increase our forecasts for GDP growth and inflation. While we remain cautious about aspects of the economic outlook, we now believe the labour market will strengthen enough to allow the RBA to remove some of the emergency stimulus currently in place. We are pencilling in rate rises of 25bps in August and November of 2018 and a further two 25bp hikes in 2019, although the precise path will be data dependent. A cash rate of 2½% by end-19 is still well below the RBA’s estimates of neutral (~3.5% nominal), suggesting monetary policy will remain supportive of the economy.
  • Real GDP figures for Q2 showed a pick up in growth to a quarterly rate of 0.8% (and 1.8% yoy). While this partly represented a bounce-back from weather disruptions in Q1, non-mining and government investment were encouraging. The main area of weakness in the figures was in wages growth, as well as dwelling construction. This is despite particular strength in the labour market so far this year, with employment growth averaging 29K per month (with three quarters of those jobs full-time) and the unemployment rate easing to 5.6% in July from a recent high of 5.9% in March.
  • GDP growth will continue to build in late 2017, as LNG exports continue to surge and government spending remains strong. We still expect growth momentum to ease somewhat through 2018 and 2019 to around 2½% – which is in line with NAB’s estimates of potential growth – although domestic demand is a bit higher in 2019. The forecast changes are largely due to a stronger labour market which feeds into (slightly) higher wages growth. The unemployment rate is forecast to ease to 5.4% by end-2017, 5.3% by end-18 and 5.1% by end-19.
  • These trends should be enough to give the RBA greater confidence that inflation will return to (the lower portion of) the target band, although our growth forecasts remain weaker than the RBA’s and some facets of the outlook bear close watching. Household income growth will remain low as wages growth recovers only gradually, limiting household spending amidst high household debt levels and slower wealth gains as housing price growth cools. Housing construction will also be adding little to growth in 2018. On the flipside, higher investment intentions are a clearer sign that non-mining investment will build, which together with strong government infrastructure spending, will help offset weakness in mining investment.
  • Risks to the view include a failure of the AUD to depreciate gradually as we anticipate. A loss of momentum in the labour market, evidence that wages growth is not responding, or evidence of household distress would also be reason for pause.

For further details, please see the attached document.