The Forward View – Australia: October 2019

Unchanged forecasts with low rates expected to persist.

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Overview

  • Our forecasts for growth, inflation and the labour market are unchanged. We expect a small improvement in growth, but for growth to remain below trend. Alongside below-trend growth we expect the labour market to deteriorate slightly, with the unemployment rate edging higher and measures of labour underutilisation remaining elevated. Inflation is likely to remain weak, with little wage pressure and strong competition keeping a lid on prices domestically.
  • With these predictions largely a continuation of recent trends, it is likely that we will see a further reduction in interest rates by the RBA. While the RBA has now lowered rates three times this year, taking the cash rate to a record low of 0.75%, we think that further stimulus will be required to support the economy, given the private sector remains weak and heightened global uncertainty poses significant risk. We have pencilled in a further cut in the cash rate of 25bps in December taking rates to a new low of 0.5%, but see a risk that a further cut to 0.25% and unconventional policy in H1 2020 will be required should downside risk materialise and more significant fiscal stimulus fail to eventuate.
  • The key dynamics behind our assessment of the economy continue to be headwinds from a weak consumer and a significant downturn in housing construction. That is being partly offset by strong public sector spending and growth in exports. We continue to expect a rise in business investment, though weak domestic demand and a slowing global economy present a risk to this view.
  • Recent tax cuts appear to have failed to provide a significant boost to household spending, given retail sales growth remains soft. We think the recent rate cuts will have an impact, but the effects will take longer and be more variable, which will make them less apparent.
  • Should the economy require further support beyond our expected cut in December, it is likely that the RBA will begin to implement a range of unconventional policies. These policies will come with the intention of lowering the risk-free rate, ensuring that the community expects rates to remain low for an extended period and also to ensure the continued flow of credit in the economy. It is important to note that we are not yet in this position, with growth still positive and the labour market relatively healthy. Any actions of this nature will also depend on economic and financial circumstances at the time. But a further slowing or significant global shock could well see rates reduced even further and increasing the need for such policies. Regardless, it is likely that rates will remain at historic lows for an extended period.

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