The Forward View – Australia: February 2020

We have adjusted down 2020 GDP by 0.5% due to bushfires & Coronavirus impacts, but boosted for 2021. RBA forecasts a big stretch.

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Our podcast series to accompany the NAB Forward View – Australia continues, giving you a 10 minute summary of our key forecasts this month.  Listen now.

 

Overview

  • Private demand remained very weak at the end of 2019 and we continue to expect very modest growth in Q4 – mainly due to net exports and public spending.  Onto that weak base we have now attempted an early view on what bushfires and the Coronavirus might do to the forecasts.
  • For 2020 we now expect a small negative for Q1 2020 growth.  Much of that will come from weaker consumption (with significant indirect impacts from confidence) and a hit to tourism, education, commodity prices and incomes.  It also seems likely that wage growth momentum has eased into late 2019/early 2020.  We make an assumption that most of the negative impacts from the virus and bushfires have passed by Q2 – albeit we don’t really expect much in the way of stronger consumption growth till 2021.  That could see y/y growth to Q2 2020 slow to around 1%.  As context to the above, tomorrow our international forecasts will see the Chinese economy forecasts with no growth in Q1 (currently it has been growing by around 1½- 2% per quarter).  In total, even if virus issues are largely sorted by mid year, Chinese growth in 2020 could slow to around 5.5% (previously 5.9%).
  • By H2 2020, in Australia we are assuming that rebuild effects from bushfires start to cut in and stabilise the  dwelling cycle – with investment in dwellings strengthening markedly in 2021 (up around 7% through the year).  By then lower rates should have boosted household balance sheets and consumption, and hopefully business investment.
  • In summary:
      • We have lowered our previous GDP forecasts by around ½% in 2020 to around 1.5%, but boosted 2021 by around 0.3% to 2¾%.  Through the year GDP is now put at 1.8% for 2020 and 2.7% for 2021.
      • While the RBA will look through the temporary activity effects in early 2020 the reality is that the labour market will also weaken by H2 2020. We still expect the unemployment rate to reach 5.5% in H2 2020 but be maintained at that rate in 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.
      • Clearly our forecasts are very different – in 2020 – from those recently published by the RBA.
  • Clearly the RBA,  given its current forecasts, don’t see the need for further cuts.  But we fear the RBA  forecasts will be proved overly optimistic very soon.  Hence we still expect two more cuts – the first in April (albeit the exact timing will be data dependent) and another by around mid year.  Hopefully fiscal stimulus will also be forthcoming in the next Budget (but we doubt the Surplus will be maintained in 2021/22 in any event).