The Forward View – Australia: September 2019

Below-trend growth and low inflation still expected as downside risks build. We have inserted another rate cut(s) in early 2020.

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We have changed our call on monetary policy. Previously we expected a cut in November to 0.75%, together with additional fiscal stimulus. We now expect a further cut to 0.5% in February, at which point the Reserve Bank would outline its plans on unconventional policy.  Unless the government delivers a meaningful fiscal stimulus, a further cut to 0.25% by mid-2020 is likely, along with the adoption of non-conventional monetary policy measures.  (Please refer to the NAB Changes Cash Rate Call for further details.)

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

  • Post the National Accounts – not surprisingly – we have not materially changed our forecasts. That said, we are increasingly worried about downside risks.  That is consistent with our August Business Survey which shows no let up in the downward loss of momentum in private demand.  Our internal data also highlights the risk that tax refunds have done little to boost spending, while business investment remains weak and the dwelling cycle could well be deeper than previously forecast.  The international outlook also is not inspiring confidence.
  • That said, our forecasts remain for GDP growth of around 1.7% in 2019, 2¼% in 2020 and 2½% in 2021 (as more expansionary policy kicks in).   As per previous forecasts the key dynamics continue to be a weak household sector, with only modest growth in consumption and declining dwelling investment offset by strength in public spending, business investment and exports in the near term.
  • These below trend forecasts see no improvement in the degree of  labour market spare capacity  and we see the unemployment rate rising slightly, reaching 5.5% by mid to end-2020 and broadly remaining there over the forecasting period.  With unemployment well above current estimates of full employment, a key implication is that wage growth will likely remain weak – though we do expect it to rise gradually.
  • We continue to expect the RBA to cut rates by 25 points by November – but are very aware that any further near term data weakness will see the October RBA meeting as live.  With the Government seemingly reluctant to further boost fiscal policy in the near term we are moving to insert another cut into our rate profile. At this stage we have tentatively placed it in early 2020 (February).
  • With tax cuts making little impact on consumer spending (and probably won’t in the near term) and rate cuts taking time to impact we continue see a need for further fiscal stimulus, through new infrastructure spending or the pull-forward of tax cuts. Unless something meaningful is done on fiscal policy we would not rule out another cut (bringing the Official Cash rate to 0.25%) by mid-2020 together with non-conventional monetary policy. It should be noted that RBA growth forecasts are still at least 0.5ppt stronger than our projections.

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