The RBA just downgraded its forecasts for the Australian economy over the coming year

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Australia’s central bank has edged lower its forecasts for economic growth in the medium term.

Today’s Statement on Monetary Policy from the Reserve Bank of Australia has the bank forecasting 2.5% GDP growth by the end of this year, down from 3% in its previous update.

The bank says the high level of the Australian dollar is a factor in its outlook.

Growth is forecast to recover to 3% in the first half of next year — although this is again lower than the previous estimate of 3.25%.

This chart shows the RBA’s latest forecasts.

Reserve Bank of Australia

“Economic activity grew more slowly than expected in the March quarter, partly reflecting some temporary factors; the outlook for quarterly growth is little changed, suggesting slightly lower year-ended growth in the near term,” the bank said.

The bank added: “Further out, GDP growth should continue to recover as the drag from falling mining investment comes to an end and the ramp-up in resource exports continues. The recent appreciation of the exchange rate has been factored into the forecasts and has had a modest dampening effect on the forecast for growth.”

The bank remains optimistic that GDP growth will return to a higher level in 2019, forecasting growth of between 3-4% — 25 basis points higher than the outlook three months prior.

This table shows the differences in the mid-range forecasts for GDP between the May and August statements:

Reserve Bank of Australia

Colonial First State Global Asset Management chief economist Stephen Halmaric slight downward revision to GDP in the medium term was partly due to a softer Q1 GDP print.

“This reflects both the weaker Q1 17 GDP reading and a tightening of financial conditions that are now embedded in the outlook,” Halmaric said.

Capital Economics chief economist Paul Dales noted that while the projections don’t look particularly different to the May statement, there are some important differences in the growth outlook.

“Due to a less bullish view on dwellings investment and presumably the influence of the stronger dollar, the RBA has revised down its 2018 GDP growth forecast from a midpoint of 3.25% to 3.0%,” Dales said.

“In contrast, it now thinks the unemployment rate will fall below 5.5% a bit sooner and that underlying inflation will rise above 2% earlier,” he added.

Given the recent strong growth in employment, the RBA has kept its of forecasts for unemployment at between 5-6% through to the end of 2019.

In view of that, it remains optimistic that lower unemployment will eventually feed into higher wages, thus providing a moderate driver for inflation in the medium term.

“Wage growth is expected to remain subdued, but to increase gradually over the forecast period as labour market conditions continue to improve,” the RBA said.

Despite that, the bank also discussed the risk to domestic consumption from the dual effect of low wages and mortgage costs.

“Slow real wage growth is likely to weigh on consumption, especially if households expect the slow growth to continue for some time,” the bank added.

Some households may also feel constrained from spending more out of their current incomes because of elevated levels of household debt.”

The expected range for headline inflation as at the middle of next year rose by 25 basis points, while the outlook for underlying inflation remains steady through 2018.

Colonial First State’s Halmaric said today’s statement doesn’t change the outlook for interest rates to stay on hold for now with a bias for the next rate move remaining to the upside.

The RBA concluded today’s statement with the following:

“The recent data are consistent with a gradual increase in inflation and a decline in the unemployment rate. Accordingly, at its recent meetings the Board has judged that holding the stance of policy unchanged would be consistent with sustainable growth in the economy and achieving the medium-term inflation target.”

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