Daily Commentary BY THE CURVE TEAM –

Slowing Growth Threatens RBA Outlook

7th of March, 2019

Even after estimates of growth were lowered leading into the release, growth in Q4 last year missed estimates with the slowdown now threatening the RBA’s outlook.

The slowdown in Australia’s growth rate continues in Q4. Growth slowed from 0.3% in the September quarter to 0.2% in the December quarter. As we expected, GDP through the year undershot the RBA’s most recent forecast of 2.8%, coming in at 2.3%. The headline figure’s biggest driver was government spending, which contributed to 0.3% of the quarter’s growth.

What was of more interest, however, were the figures around household spending, which remain a primary uncertainty in the RBA’s outlook. Household spending continues to trend lower with the annual rate of growth moderating from 2.5% in Q3 to 2% in Q4.

The drop in spending was accompanied by a slight uptick in the household savings ratio which has been in a down trend for a number of years. This could be seen a sign that falling house prices and the accompanying wealth effect is impacting consumer behaviour.

This effect could intensify over the months ahead with house prices still falling.

Prior to the release of these figures, Governor Lowe stated in the Q&A following his speech yesterday that “it’s hard to think of a scenario where interest rates would go up this year,” due to muted inflation pressures and subdued wage growth. Given he also sees risks to the outlook are balanced, it could be assumed he also might see little case for a rate cut over the year ahead either.

However the latest data casts further doubt over the RBA’s outlook and is adding to the downside risks should the slowdown in growth continue.

Nonetheless, in light of his other comments it seems Governor Lowe and the RBA are reluctant to cut rates and run-up already high levels of household debt as it continues to place its faith in the labour market. Hence, until employment data starts to dip, we can expect the RBA to maintain its’ neutral outlook.

Neyavan Suthaharan

Client Services Officer