The Forward View – Australia: August 2019

Below-trend growth and low inflation – another rate cut ahead.

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This month we have recorded a podcast to accompany the Forward View – Australia, giving you a 15 minute summary of our key forecasts this month. To listen, just click the link below.

  • We have not materially changed our forecasts this month, with the exception of a near-term tuning of our Q2 GDP forecasts based on weaker than expected consumption partials and a stronger than expected trade balance. At this point we expect Q2 GDP to rise by between 0.4-0.5% which will see the year ended rate fall to around 1½% – a relatively weak outcome. Beyond that, our forecasts remain unchanged, with year-average growth of 2¼% in each of the next two years. The key dynamics continue to be a weak household sector, with only modest growth in consumption and declining dwelling investment offset by strength in public spending, business investment and exports in the near term.
  • Given our outlook for below trend growth, we see the unemployment rate rising slightly, reaching 5.5% by end-2020 and broadly remaining there, on the back of slowing employment growth. With unemployment well above current estimates of full employment, a key implication is that wage growth will likely remain weak – though we do expect it to rise gradually.
  • On the inflation front our outlook remains subdued. We expect core inflation to gradually lift from here, but for it to only reach the bottom of the RBAs target band in late-2021. While the exchange rate has deteriorated somewhat recently, the pass through to consumer prices is likely to be lagged and comes in the face of weak global inflation. Domestically, ongoing weak wage growth and strong competition will likely see market sector prices growth remain contained, while housing (a large component of the CPI) is expected to remain weak.
  • Consequently, we expect further policy easing, with the opportunity for the RBA to move back to the target more quickly. We see a further cash rate cut in November to a new record low of 0.75% but do not rule out the risk of further cuts or unconventional policy measures. In addition we think that there is the need for further fiscal stimulus, through new infrastructure spending or the pull-forward of tax cuts. The impact of tax cuts to date is likely to be small, while the impact of rates – which will have a larger effect – is likely to take some time to flow through to the economy.
  • Indeed, the RBA sees inflation remaining low for a significant period with little chance of a rise in rates before inflation sustainably rises towards the middle of the band – a gradual process. It should be noted that while the RBA currently forecasts growth around 0.5ppt stronger than our own persistently over the next two years, the outlook for inflation is not dissimilar. Our outlook for the labour market is weaker.

For further details, please see  The Forward View – Australia August 2019