The Forward View – Australia: February 2019

Growth still reasonable but to move below trend – with rates now unlikely to rise. Indeed a significant & growing risk of a cut.

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While we have fine tuned some of our near term forecasts – to include weaker than expected private consumption and net exports in Q4 2018 – we have fundamentally not changed our GDP forecasts. In brief we continue to worry about the consumer. Indeed both our Business survey and internal NAB data point to continued consumer weakness in the early part of 2019. Also construction looks likely to be hit. Overall our key forecasts remain unchanged with GDP growth of 2.4% in 2019 and 2.2% in 2020 – with a more marked slowdown in the through the year numbers (2.7% and 2.2% respectively).

A key change to our forecasts this month relates to our interest rate forecasts. We no longer see the next move in rates as up – with an unchanged forecast over the next few years. That said, we are now seriously contemplating the possibility of a cut. In short our forecasts raise the question as to why the RBA would not move to give the economy a pre-emptive boost. Certainly any sign of deteriorating labour market conditions would be enough to see the RBA act more quickly than is currently expected (See our Rate Change Note out yesterday).

On the forecasts themselves, it is important to emphasise that we still see a reasonable outcome for the economy – albeit significantly weaker than the RBA expects. 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. Exports are expected to continue to grow relatively strongly – as the last of the large LNG projects reach full production capacity. And we see the weakness in Q4 net exports as likely to be reversed in early 2019.

Against that, private sector consumption will continue to weigh on growth, with consumers facing significant further headwinds. In particular, we see ongoing slow wage growth, a falling savings rate, high debt levels and falling house prices. While there is limited evidence, as yet, of a significant wealth effect of house prices it clearly will not help. Beyond a turnover related slowdown in retailing of household goods we do expect a pronounced downturn in the construction cycle. We expect dwelling investment to fall by 18% peak-to-trough.

Not surprisingly we haven’t changed our forecasts for the labour market which still sees unemployment dropping a touch below 5% in the near term but making little improvement thereafter (at around 4.9%). With our estimate of the NAIRU well below 5%, we also continue to only modest growth in wages to between 2.5 to 2.7% by end 2019 and core inflation not back above 2% until end-2019 before moving moderately higher into 2020.

Find out more in The Forward View – Australia: February 2019