Daily Commentary BY THE CURVE TEAM –

RBA Hold Firm Amid Growth Slip

7th of June, 2017

Australia’s economy now looks like it has slowed to almost stall in the first quarter after the latest run of partial indicators. This hammers home just how hard it is to forecast the exact GDP number, with economists once again scrambling to revise their forecasts after yesterday’s partial indicators. 

After revising up forecasts following the larger than expected build in inventories over the first quarter, forecasts were quickly revised back down after net exports missed to the downside. Following weather related disruptions, net exports are now expected to drag growth down 0.7% for the quarter, much more than the 0.4% that was previously expected. Weaker than expected government spending also contributed to the downside risks.

Even with the expectation of a weak or even negative number, the RBA still expects growth to rebound. In the accompanying statement to the decision to hold rates steady at 1.50%, Governor Lowe said that looking forward, economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.”  

The RBA remains quite optimistic despite downside risks to their outlook starting to build. Net exports should help boost growth over the next quarter or so, as the dip in activity due to cyclone Debbie picks back up. Beyond that, the growth outlook actually looks a little grim.

We know from consumer sentiment surveys that consumers feel worse off. We can see that in the consumption figures so far this year, which have been weak to say the least. The RBA acknowledged as much, saying that “slow growth in real wages is restraining growth in household consumption.” Compounding this issue is the fact that “wage growth remains low and this is likely to continue for a while yet.”

That does not bode well for future growth, especially as the latest pillar of growth, housing construction, shows increasing signs of peaking. Additional regulatory oversight for lending is also providing a headwind to the housing market in general which also threatens consumption. Any souring of the housing market is likely to see consumers increase their focus on repaying debt, resulting in a further hit to consumption.

The building downside risks to the outlook have been reflected in the market pricing for the cash rate. After almost having a rate hike priced in for next year, the market now has no move priced in for at least the next year and a half. There is even a 1 in 4 chance we see a cut by early next year. 

I will delve further into the outlook for the economy and monetary policy in next week’s Curve Monthly Insights so stay tuned. 

David Flanagan

Director - Interest Rate Markets