- The Australian economy slowed sharply in the second half of last year.
- Financial markets are now fully priced for the RBA to cut Australia’s cash rate by 25 basis points by the end of this year.
- Opinion is divided as to whether the Q4 GDP warrants further monetary policy support.
Australia’s economy is slowing sharply, growing by around 1% per annum between July to December, well below the 4% pace seen in first six months of the year.
Had it not been for population growth or the government, Australia would have actually fallen into recession.
The chief catalyst behind the slowdown has been the household sector with consumption far weaker than is usually the case, indicating that Australians are struggling even though the jobs market appears to be fairly strong.
With spending weak, it adds to the case for both monetary and fiscal stimulus to help support what is the largest part of the economy.
Financial markets have already made their mind up about the result, pricing in a full 25 basis point cut to Australia’s cash rate by the end of this year. The Aussie dollar has also fallen, as have government bond yields, indicating a greater chance that the RBA will be forced to cut rates.
But do economists think the same? Here’s a collection of views we’ve received following the GDP report.
Bill Evans, Westpac
The economy lost considerable momentum in 2018, slowing from around a 4% annualised pace in the first half of the year to around a 1% pace in the second. This was centred on housing and the consumer against the backdrop of a further tightening of lending standards and persistent weak wages growth. A negative supply shock from the drought in NSW and surrounds is another negative.
Mid-2018 was the turning point for new home building, with strong gains now giving way to sizeable declines. The slump in dwelling approvals points to the downtrend continuing in 2019.
With the residential construction cycle now turning down, business investment mixed, the savings rate now edging up, and house prices and new lending contracting, prospects for [the RBA’s current GDP forecasts] look bleak.
In such circumstances, with 150 basis points of “flexibility”, the RBA is expected to cut the cash rate by 25 basis points to 1.25% in August and follow that up with a second cut of 25 basis points in November, recognising confirmation of persistent below trend growth.
Ben Jarman, J.P. Morgan
For the RBA, the key as always is the labour market.
Fortunately, the volatility in output growth of late has not been mirrored in the labor market. The latter obviously lags the former, though, meaning the RBA is effectively targeting its own unemployment rate forecast. Taken together with other leading indicators, pushing today’s pace of domestic demand growth through our models projects an unemployment rate of 5.2%.
This must leave RBA officials uncomfortable, given that their forecast is for a slight decline in unemployment, and as a weak housing market is being held together from a financial stability perspective by household income growth.
The performance of the household sector is therefore key to watch from here. January retail sales data are out tomorrow, and the labour market data for February are out next week.
Ben Udy, Capital Economics
The subdued GDP growth in the final quarter of 2018 sets the tone for softer growth throughout 2019.
Household consumption increased just 0.4% over the quarter, a fraction faster than the 0.3% rise in Q3. And with less growth in consumption households seemingly chose to put any extra income towards their savings, that led the saving rate to edge up to 2.5%. We suspect this is a consequence of the decline in household wealth due to falling house prices.
Another consequence of the housing downturn is the sharp slowdown in dwellings investment, which fell 3.4% over the quarter. And businesses also appear reluctant to invest following the declines in business confidence, with non-mining investment declining 0.8%.
Overall, today’s data paint a bleak picture of the Australian economy. And given that the housing downturn and weak business confidence has continued into 2019 we don’t think that weakness was a one-off.
This will force to RBA to reconsider it’s optimistic outlook for the Australian economy and place rate cuts firmly on the table. Indeed, given the RBA has already adopted a neutral stance, it’s becoming increasingly likely that they will cut rates in August, earlier than we had previously anticipated.
Michael Blythe, Commonwealth Bank
The slowdown in the second half reflects an array of negatives holding back consumer spending, the initial stages of a downturn in residential construction, the flow on from falling residential sales activity, the last legs of the downturn in mining capex and the ongoing effects of the drought.
Falling house prices pose a threat to the real economy via a negative wealth “shock” and the impact of falling sales and construction activity on parts of consumer spending.
Looking ahead, some positive growth drivers remain. LNG exports will continue to grow. The public infrastructure boom rolls on. Rising Asian incomes will drive key areas like education, tourism and food exports. Business capex plans remain positive. And the income side of the growth equation shows a better picture than the spending side.
The weak GDP growth in H2 2018 is not the smoking gun to validate calls for an interest rate cut. And it explains why the RBA has emphasised the importance of the labour market in determining the direction of interest rates. From that perspective, weak GDP growth is a negative for labour demand. But today’s data also shows falling real labour costs, which will support labour demand. CBA’s labour demand indicator, based on trends in output growth and labour costs, indicates positive job outcomes are set to continue. Other leading indicators send a similar message
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