Official interest rates will stay low in 2014 with weak jobs growth and a subdued economy, says Deloitte Access Economics in its December quarter business outlook report.
And they’ll stay low until at least 2015 as the economy deals with the fall in construction investment.
Economist Chris Richardson says the Reserve Bank has done everything but pay for drinks at the bar in an attempt to get a party started in retail and in housing construction.
“The dollar is finally starting to take its foot off the throat of Australia’s economy,” he says.
Deloitte Access Economics forecasts the dollar at 88.5 US cent in 2014-15, falling to 85.6 in 2015-16.
Richardson says: “Add in good news from the US and solid news from China as well as the growing dividend in export volumes from the nation’s new mines, and there are some powerful positives in play for the Australian outlook.”
However, there are key negatives as well including the construction cliff.
“Resource-related construction has peaked, and its fall from heady heights will hurt an Australian economy where businesses are already facing soft revenues and stagnant profits,” he says.
“Add in continuing caution from corporates and families and the potential for modest Federal Government cutbacks to address a Budget black hole, and that backdrop for business should keep overall Australian economic growth a bit below trend through to late 2015.”
Richardson forecasts Australian GDP (Gross Domestic Product) moving to 2.7 per cent in 2014-15 from 2.5 per cent this financial year, and 3 per cent in 2015-16.
Globally, Deloitte Access Economics sees the US recovery accelerating, Japan better than it was, Europe avoiding its pitfalls and China hitting current growth targets.
“That should be enough to generate a modest lift in global growth, and may also get Australia’s major trading partners back to trend growth in 2014.”
With the world’s central banks winding back their stimulus, the $A will remain under pressure in 2014 and 2015.
And a weak economy should keep “official rate rises at bay until 2015”.
Deloitte Access Economics Business Outlook:
A weak economy means weak inflation. Headline CPI growth will be subject to one offs around energy prices (carbon and gas price effects) and cigarettes (due to tax hikes). These special effects will add a little to overall inflation – but not much. Stripped of these effects, the story we’ve been telling for a while remains evident: inflation just isn’t a short term worry in Australia. The ‘construction cliff’ will keep the economy subdued, and hence little threat of passing pricing power to businesses. And it will also keep job growth on a leash, and therefore wages too. Moreover, although it’s unlikely that wage growth will stay near its current record lows, we don’t project it to recover fast. Finally, it is true that the fading $A is adding to price pressures, but a drooping $A won’t offset the benign impact on inflation of a weak economy and weak job growth.
The global crisis led to an extraordinary response, with central banks opening the taps on cheap money. But 2014 will be the year in which money becomes less cheap, first as less money is ‘printed’, and then in 2015 as interest rates rise. That will mean the crisis is receding. Yet there’ll be turbulent times ahead for those markets, sectors and nations addicted to cheap credit. The story is different in Australia, where a weak economy should keep official rate rises at bay until 2015. Yet there’s a chance that the receding global crisis will take enough pressure off the big banks that they’ll cut rates even if the Reserve doesn’t.
Job growth is crawling due to the weak economy and the rapid pace of baby boomer retirement. And that deadly duo of weakness in job demand and worker supply is set to stay around for a while longer as the construction cliff eats into resource-related construction employment and as the $A is still at job killing levels. Yet there are important positives too. First, interest rates will stay low (boosting job prospects in housing construction and in retail), and the $A is less of a headwind than it was. Second, although rapid retirement is bad news for employment growth, it helps to limit unemployment rates. The latter may rise above 6%, but not by much.
Business Insider Emails & Alerts
Site highlights each day to your inbox.