RBA sees lower growth, weak inflation and a slower decline in unemployment

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  • The Reserve Bank has downgraded its economic forecasts for GDP and underlying inflation this year. It also sees slower progress in lowering unemployment.
  • It still sees underlying inflation moving back to 2% by the end of next year despite an expectation that unemployment will hardly decline and wage growth will remain low over the same period.
  • The central bank repeated that it will be “paying close attention to developments in the labour market at its upcoming meetings”.

Australia will see slower economic growth, a slower return of inflation to the bottom of its target range and slower progress in lowering unemployment in the years ahead.

That’s the latest projection of the Reserve Bank of Australia.

In updated forecasts provided in its quarterly Statement on Monetary Policy (SoMP) released on Friday, the central bank downgraded its expectations for economic growth and inflation in the year ahead, along with seeing slower progress in lowering unemployment.

This table from the RBA shows the new forecasts compared to those released in its February SoMP:

RBA

With economic growth undershooting its expectation by some margin in the second half of last year, the RBA has downgraded its near-term GDP forecasts, now seeing economic growth of 2.75% by the end of this year, down from 3% three months ago.

Like GDP, with underlying inflation coming in well below expectations in the March quarter of this year, the RBA now sees slower progress in returning it to the bottom of its 2-3% target, now forecast by the middle of 2020 rather than the end of this year as seen three months ago.

Curiously, that’s despite an expectation that unemployment won’t fall until late 2020, and only by 0.1 percentage points from its present level of 5%.

In its May monetary policy statement, released just three days ago, the RBA said: “A further improvement in the labour market was likely to be needed for inflation to be consistent with the target”.

Now, however, underlying inflation is seen moving back to the bottom of its target by the end of next year even though unemployment will barely budge from 5%.

Confused? You’re not alone.

“The RBA has delivered a somewhat confusing message in the SoMP,” said Michael Blythe, chief economist at the Commonwealth Bank of Australia.

“They have lowered near-term underlying inflation forecasts and revised up headline [inflation] projections.”

The lift in underlying inflation back to the bottom of its target also comes despite an expectation that wage growth, as measured by the ABS Wage Price Index, will only accelerate to an annual pace of 2.5% by the end of next year, only marginally above the 2.3% level where it currently sits.

So while wage growth is expected to be a little firmer in the year ahead, it too is unlikely to provide much of a tailwind to either inflationary pressures or household spending growth.

Within the SoMP, the RBA noted that “administered price inflation has been below average because of a range of policy decisions designed to address cost-of-living pressures”.

“Further initiatives in this area could constrain inflation in utilities and other administered prices — this represents a key uncertainty around the inflation outlook,” the RBA said.

Importantly, the forecasts incorporate market pricing on the outlook for the cash rate, so slower growth, a slower return of inflation to the bottom of its target range and slower progress in lowering unemployment is underpinned by the view that official interest rates will sit at 1% by the middle of next year.

The Aussie dollar is also seen as being marginally weaker, with crude oil price slightly higher, than three months ago.

If the forecasts offered by the bank are already factoring in a lower cash rate and Aussie dollar, and higher crude prices, it raises the question as to why the RBA has not already cut official interest rates?

According to the bank, “the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target”.

As for what could cause the RBA to reassess that view, it noted that it will be paying “close attention to developments in the labour market at its upcoming meetings”.

Next week, the ABS will release Australia’s March quarter Wage Price Index along with the April jobs report.

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