Morgan Stanley has revised down its forecast for Australia’s 2017 GDP growth to 1.2% from 2.1%.
That’s well below the RBA’s forecast of 2.5%, and continues a trend of negative revisions centered around the theme of lower consumption growth.
The current headwinds to consumption are outlined in a research note called “Australia: The Consumption Crunch”, by Morgan Stanley analysts Daniel Blake and Chris Nicol.
In making their case for reduced consumption, Blake and Nicol highlighted the familiar problems of low wage growth and higher costs of living.
They also cited a third “unappreciated” factor, arguing that Australians will have less access to consumer finance and motor vehicle lending “as regulators take a stricter interpretation of responsible lending guidelines”.
In addition, they highlighted headwinds to Australia’s booming house prices stemming from the latest macro-prudential (MacroPru) restrictions on interest-only lending.
“The second round of MacroPru will directly hit the last remaining driver of the housing market – interest-only-driven investment demand,” they said.
The flow-on wealth effect of rising house prices has helped to off-set the falls in consumption from lower wage growth.
However, as house-price growth slows households are likely to place more focus on paying down debt, which puts the retail sector under more stress from reduced discretionary spending.
Morgan Stanley is also maintaining its forecast that unemployment will rise to more than 6% in 2018 as the booming growth in apartment construction slows.
Blake and Nicol said that recent employment figures were representative of the pressures on wage growth, given the high levels of under-employment and part-time work despite a “relatively stable” unemployment rate of 5.8%.
The net effect is that Australia is now “decoupling further from the global recovery, with the consumer facing a cash flow and credit crunch”.
That may go part of the way to explaining the recent separation between the ASX200 and its global counterparts.
While major indexes in the US, UK and Europe as well as Asian markets all rose in May, the ASX reversed the trend and fell by around 3.4%.
Morgan Stanley is maintaining its prediction that the RBA will hold rates at 1.5% through 2018, trapped by the competing forces of low wage growth and housing stability risks.
Blake and Nicol said that would allow policy makers to “buy time” and gain the economic benefits from a weaker Aussie dollar as the US Federal Reserve raises rates and potentially tightens monetary policy.
They said that the government could get involved with more fiscal spending, but was unlikely to do so.
“We think that the government continues to prioritise the AAA sovereign rating defense, which leaves little scope for stimlus,” they said.
In a more bullish scenario, the two analysts said that Australia will have to be reliant on the flow-on effects from global growth and capital expenditure.
The more negative case is that weaker consumption growth and slowing house prices drag the economy into recession as households focus on saving and paying down debt.
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