Goldman Sachs Sums Up The Challenges For Australia's Domestic Economy In One Sentence

Weather anomalies over the past six months, which GS believes are distorting inflation data.

The key phrases in the RBA’s decision on interest rates yesterday were that monetary policy is “appropriately configured” and that the “most prudent course is likely to be a period of stability in interest rates”.

Many take this as a signal that the bank’s easing cycle is done (it was even the headline in the FT’s report on the decision) and that the next move in rates will be up, towards the end of the year or early next.

Goldman Sachs takes another view – that the RBA will still have to cut mid-year – built on an assessment that Australia’s economy is still pretty subdued, and a belief that the surprisingly high inflation number, at 2.7%, for the last quarter was partly driven by extreme weather.

GS chief economist Tim Toohey and his team summarise lay this out in a note to clients today in which they move their forecast for the next rate cut from March to July this year, and also neatly encapsulate the domestic challenges for Australia here:

The bottom line is that weather anomalies have temporarily distorted the data, underlying inflation is around the mid-point of the RBA’s target band, inflation expectations are near a 20-year low, domestic demand remains tepid, employment is contracting, and the biggest challenge of Australia’s long expansion – the normalization of the commodity prices and investment booms – lies ahead in 2014 and 2015.

GS believes the domestic economy remains exceedingly patchy and with some big government spending reductions likely in May, the RBA will need to step in again before too long. “We continue to believe the combination of declining mining investment, declining commodity prices, a still disappointing acceleration in non-mining activity, and the announcement of the first phase of the new government’s fiscal consolidation plans will be the catalysts to see the RBA reduce interest rates once more this cycle,” the note says.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.