- The Reserve Bank of Australia (RBA) sees faster economic growth, lower unemployment and inflation pushing back towards the midpoint of its target over the coming years.
- Underpinning this view, the bank expects household consumption — more than 50% of the economy — will continue to grow around 3% per annum.
- Westpac Chief Economist Bill Evans describes this view as “courageous”.
- While the RBA’s latest forecasts suggest its moving towards lifting official interest rates, Evans says that won’t happen until at least 2021.
The Reserve Bank of Australia (RBA) expects Australian household spending will continue to grow around 3% per annum, helping to underpin its optimistic forecasts for GDP growth, unemployment and inflation given it accounts for over 50% of the Australian economy.
Bill Evans, Chief Economist at Westpac Bank, believes that view is “courageous” given the current set of circumstances.
“The view around consumption growth being sustained at 3% looks courageous,” he says.
“It relies on ongoing growth in employment despite a clear slowing through 2018, the elusive pick-up in wages growth, and only a relatively small wealth effect that might be related to the ongoing falls in house prices and associated household wealth.
“We would expect that with the savings rate down at around 4%, this wealth effect is likely to be more significant.”
So the combination of ongoing weakness in the housing market, slowing employment growth and low levels of household savings will act to dampen spending levels in the period ahead.
Along with underestimating the impact of the housing downturn on household spending, Evans says the RBA is not being realistic about the outlook for residential construction.
“The assumption is that the fall in building approvals, which is already apparent and the information the RBA has received from its liaison contacts in the industry that off-the-plan sales have slowed significantly, will not significantly impact activity until beyond 2020,” he says.
“This seems to overlook evidence of a clear slowdown in non high-rise approvals, the likelihood of an increase in abandonments of approvals which are already in the system, and evidence, which the RBA notes, that ‘lot sales for new detached housing have also declined sharply in Sydney and Melbourne since late 2017’.”
While the RBA acknowledged in its quarterly Statement on Monetary Policy (SoMP) that there was plenty of domestic uncertainty towards these areas, that didn’t stop the bank from predicting a stronger and longer pickup in GDP growth than what was previously forecast, leading to lower unemployment and slightly faster increase in underlying inflation ahead.
Combined, that combination signals the bank is moving closer to lifting official interest rates.
However, the RBA’s nirvana-like forecasts are never likely to be replicated in reality, says Evans.
“On face value, the stronger growth and higher inflation forecasts might imply that the RBA is closer to raising rates than we have expected,” he says.
“That may well be the case from their perspective.
“But if the economy evolves as we expect with a slowdown in consumer spending, a contraction in residential investment, and softer confidence partly linked to global uncertainty, the RBA’s growth and inflation forecasts are unlikely to be achieved.”
As such, Evans maintains the view that economic growth will fall short of the RBA’s lofty expectations, ensuring the cash rate will remain at 1.5% until 2021 at the earliest.
“Westpac confirms its view that the cash rate will remain on hold through 2018, 2019 and 2020,” he says.