December 11, 2019

The Forward View – Australia: December 2019

Private demand still “running on empty”. Broadly unchanged forecasts but concerns to the downside. Fiscal policy help unlikely.

This month we have recorded a podcast to accompany the Forward View – Australia, giving you a 10 minute summary of our key forecasts this month. Listen now.


  • Post Q3 GDP we have not fundamentally changed our forecasts.  Indeed, the Accounts only reinforced previous concerns about the current state of private demand and its prospects going forward. As our November Business survey showed there is still no momentum in the private sector, while our internal data shows Black Friday and Cyber Monday sales produced only marginally higher monthly sales in November 2019 vis a vis November 2018 (and come post the poor October retail sales figures). It appears that tax refunds and rate cuts have been used for balance sheet repair by households rather than consumption.
  • Meanwhile investment in dwellings continues to fall and private sector investment shows worrying weakness – with no improvement in sight. For 2019 our forecasts are unchanged at 1¾%, while 2020 and 2021 are down a touch to 2.0% (was 2.1%) and 2.4% (was 2.5%), respectively.
  • We have broadly maintained the shape of our growth forecasts. The key dynamics behind our assessment of the economy continue to be headwinds from a weak consumer and a significant downturn in housing construction. We have also slightly lowered business investment. Partially offsetting this is strong public sector spending and growth in exports.
  • In summary:
    • Through the year forecasts of GDP during 2020 are broadly unchanged at 2.1% to December 2020 and 2.5% to December 2021.  These are much weaker than the RBA (2¾% and 3% respectively). In our view, the RBA faces the need for another downward revision to their projections. As we head into the MYFEO we are expecting growth of only 1.8% in 2019/20 and 2.3% in 2020/21.  That implies a significant hit to the Government’s previous economic forecasts.
    • Again our forecasts would not be enough to lower unemployment which we still see at around 5.5% by mid to late 2020 and into 2021.
    • Inflation forecasts are unchanged with core inflation not back to around 2% (bottom of the band) by end 2021.  That reflects weak wage growth and ongoing margin pressures – especially in wholesale and retail.
  • As noted in our Rate Change Note last week, with the Government unwilling to use policy to meaningfully boost activity we added another 25bp cut to our cash rate track – which together with a cut in February takes the cash rate to 0.25% by mid 2020. At this point, we see an increased risk of a move to ‘unconventional’ policy in H2 2020 should the labour market deteriorate more significantly than we forecast. That is a real prospect.

For further details, please see The Forward View – Australia December 19