The ANZ has become the latest in what is becoming a long line of economic forecasters to downgrade the outlook for Australian growth.
Unlike others, such as Credit Suisse, the ANZ does not believe the RBA will cut but rather that they will hold rates at 2.5% for longer before moving rates higher in late 2015.
Here are the highlights:
Growth Profile: revised down our growth profile for Australia, and now expect slightly softer growth in 2015 and 2016 of 2.9% and 3.2% respectively. This new forecast incorporates recent sharp downward revisions to our iron ore price forecast, and has seen us take around 1ppt off our nominal GDP forecast and around ¼ppt off real GDP growth.
Falling commodity prices is going to hit hard and will weigh on profits and wages, while also reducing both company taxes at the federal government level and royalties at the state level. They will in turn constrain consumer spending and business investment, and lead to an extended period of weaker than usual growth in public demand. Importantly, these revisions represent a delay in the return to trend growth rather than a change in the trajectory of the Australian economy.
Monetary policy will stay lower for longer because with lower growth and little inflationary pressure, the RBA has scope to keep monetary policy accommodative for longer. Accordingly, we have revised our cash rate forecasts. We still expect a new tightening phase to commence next year, but have pushed back the timing of the first rate hike from May to November. We expect 100bps of rate hikes over the following year to take the cash rate to 3.5% by the middle of 2016.
The Aussie dollar is going lower Taking into account the impact of these interest rate revisions, ANZ Research estimates that fair value for the AUD is about USD0.79. Despite this, we maintain our USD0.82 forecast for end-2015 and believe that either a rate hike from the US Federal Reserve, or a further step down in key commodity prices would be a more compelling trigger to further downgrade our forecasts.