• The key change to our forecasts this month is a delay in our expectation for a first rate rise. For some time we have recognised that a hike in mid-2019 by the RBA was unlikely based on recent data flow which suggests that despite robust growth (largely as we expected), price pressures remain weak (weaker than we expected). The RBA also appears more patient than expected, likely waiting for hard evidence of inflation returning to target on an ongoing basis. We have lowered our price and wage forecasts to be more in line with recent experience as well as slightly lowering our expectations for growth.
• In addition we have lowered our forecasts for dwelling prices in 2018 and 2019. We now expect prices to be down around 5% in 2018, around 4% in 2019 and a touch lower again in 2020. We now foresee a peak-to-trough fall around 15% in both Sydney and Melbourne. That is, however, consistent with an orderly – but deeper correction in house prices. The impact of this sees lower investment in dwellings in each of 2019 and 2020 than previously expected. Wealth effects also detract moderately from consumption in the out years.
• It is important to note that we still see a reasonably robust outcome for the economy. Areas of strength include public sector demand – both infrastructure spending and NDIS-related public consumption. We also expect non-mining business investment to benefit from additional infrastructure spill-overs. Mining is also a still potential upside factor to the forecasts, with that sector now clearly reporting the strongest conditions and confidence. Exports are expected to continue to grow relatively strongly – as the last of the large LNG projects reach full production capacity – and then level off.
• Our key concern remains developments in the household sector with weak consumption growth – which is likely to weigh on broader economic growth (accounting as it does for over half of all economic activity). We still see weak wage growth, high debt levels and now increased anxiety from slower growth in household wealth. As noted above the construction cycle is now likely to be more negative than we previously expected.
• On a more positive note, recent data continues to indicate strength in the labour market – with our Business survey pointing to ongoing growth in employment of around 20k+ per month.  As a result unemployment could well fall to around 4¾% by early/mid-2019. Thereafter, with growth slowing to around potential, further falls are not expected.

For further details, please see the attached documents.

The Forward View – Australia: December 2018

NAB Changes Rate Call: December 2018