Daily Commentary BY THE CURVE TEAM –

GDP Miss Casts Doubt Over RBA’s Outlook

6th of December, 2018

The RBA has remained steadfast in defence of its outlook even as the data slowly starts to turn but yesterday’s GDP release could prove to be the turning point.

Growth for the third quarter in Australia came in at 0.3%, half what was expected and confirmed that the economy slowed from the high water market set in Q2. After helping to underpin growth in Q2, household consumption ease back in Q3, driven by a fall in discretionary spending.

The biggest indictor pointing to the slowdown in growth was the fact that GDP growth per capita actually fell in Q3. So without the elevated levels of population growth that the country is currently experiencing, growth would have fallen.

With growth missing estimates, it calls into question the RBA’s growth forecasts for 2018. The unexpected slowdown now means that growth will need to bounce back and increase by 1.3% in Q4 for the RBA’s forecasts to be hit. That seems highly improbable given the headwinds to consumption that are only going to intensify over the months ahead.

As a result, the market has re-calibrated its expectations for monetary policy with no move now expected according to market pricing for the foreseeable future. Many commentators and economists are now suggesting that the next move in the cash rate will be down and their arguments are rather compelling.

It is hard to see the RBA being able to justify its forecasts and central outlook for much longer if the data continues to move away from them. That said, RBA Governor Lowe has on a number of occasions said that the hurdle for a rate cut is very high. It sets the scene for a very interesting year ahead which I will take a look at in next week’s Curve Monthly Insights.

Before we get there though, we have a few more key data points to be released with retail sales and trade data today followed by new lending approvals next Monday.

David Flanagan

Director - Interest Rate Markets