The Forward View – Australia: July 2019

Forecasts unchanged – including key drivers of growth. Rate cuts to help but mainly in 2020. Fiscal stimulus impact small.

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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. To listen, just click the link below.

  • We have not changed our forecasts for this year and each of the next two years. We expect continuing sluggish activity in Q2 – with through-the-year growth to June, moving down to around 1.3% – before improving somewhat in H2 2019. That gives year-average growth in 2019 of 1.7% with through-the-year growth of around 2% by years-end. Further out, year-average growth remains around 2.3% in 2020 and 2021. That growth is below trend and hence unemployment deteriorates further – with unemployment reaching around 5.3% by end 2019, before moving up to around 5.5% in 2021.
  • The key drivers of our forecasts also have not changed. That is we see growth being constrained by still weak consumption growth over the next few years (despite scheduled tax cuts), with key drivers being the impact of slow growth in incomes (due to only moderate wage growth), high debt levels and potentially some impact from the fall in house prices. We also expect ongoing sizeable falls in dwelling investment over the next two years – a peak-to-trough fall of around 20% of which around 5% has already occurred. Offsetting some of this weakness, we expect a ramp up in LNG exports to provide support in the near-term, as well as ongoing spending in the public sector (infrastructure and NDIS).
  • Much focus has recently been on the impact of recent rate cuts and fiscal policy. To explore these impacts we have used the AUS-M Model to try to quantify  their impact on the economy (see also page 6). On rate cuts, we have included the two recent cuts and assumed a further 25bp cut in late 2019. The rate cut scenario shows a small boost to though the year growth by end-2019 (around 0.2%) before building into 2020 to peak at around 0.8%. This also sees a reduction in unemployment of around 0.2ppt relative to base line. The fiscal policy shock includes over $7.0bn in tax cuts in 2019/20. Not unexpectedly, the impact even by late 2020 is very modest at around 0.15 points to y/y growth  – the impact on GDP of these tax cuts is small and tax multipliers reduce the expenditure effect even further.
  • Overall, these activity outcomes imply very weak underlying inflation and we do not expect to see core inflation at the bottom of the 2-3% target until mid-2021. On monetary policy, as noted above, we are factoring in another cut in late 2019 – but see a risk of further monetary policy action should the economy weaken further. Thus, unlike the RBA, we do see the outlook as having deteriorated recently. However we do agree with their assessment that other areas of policy need to lend a hand – especially fiscal and structural policy.

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