May 15, 2019

The Forward View – Australia: May 2019

With a weaker inflation outlook, rate cuts ahead.

Our forecasts are largely unchanged from around the time of the release of the budget with the exception of a weaker inflation outlook. We still expect growth of 2.0% in 2019 and around 2¼% in 2020 and 2021. Alongside this below trend growth we forecast the unemployment rate to see little further improvement – remaining flat over 2019 before drifting up over the forecast out period. With below trend growth and ongoing spare capacity in the labour market, inflation is likely to remain weak. We expect underlying inflation to be 1.3% over 2019, before gradually picking up, but only to the bottom of the target band by the end of 2021.

We see growth being constrained overall by still weak consumption growth over the next few years, with key drivers being the impact of slow growth in incomes (due to very moderate wages growth), high debt levels and potentially some impact from the fall in house prices. We also expect a sizeable fall in dwelling investment – of around 20% – over the next two years. Against this, we still 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). Also helping is an expected pick-up in business investment.

A comparison of through-the-year forecasts suggests our forecasts are broadly in line with the RBA for 2019 – with the Bank forecasting 2¾% in comparison to our expectation for 2.5%. Further out, however, we are notably weaker forecasting growth closer to 2¼% while the RBA has maintained growth at 2¾%. As a result, we see a weaker labour market with the unemployment rate drifting up slowly especially into 2020 and beyond, while the RBA sees a flat profile for the unemployment rate through to end 2020 and a small improvement in 2021.

With our outlook for below trend growth, and below target inflation combined with little further improvement in the labour market, we expect the RBA to cut rates twice in 2019, taking the cash rate to a new record low of 1%. However, with the RBA still looking for an improvement in the labour market and monthly figures often volatile, we recognise that the timing of the first cut will be especially data dependent. At this point the next three meetings are clearly live and we expect a cut by at least August. We have left our call for the first cut as July, with a follow up in November. On the one hand a marked deterioration in upcoming labour market data as well as weaker national accounts partials, could see the cut brought forward to next month. Against that a cut could be delayed to August when the Bank will have observed another quarter of likely weaker GDP growth, a further update on the CPI and a revised set of staff forecasts ahead of the next SMP.

Find out more in The Forward View – Australia May 2019