Australian economic growth looks set to remain sluggish for the foreseeable future, leaving employment growth weak, unemployment elevated and inflation pressures incredibly benign.
And that means that interest rate hikes from the RBA won’t be seen until at least 2019.
That’s the view of economists at the National Australia Bank (NAB) who say that tepid economic conditions look set to remain sluggish “as far as the eye can see”, putting the bank at odds with significantly more optimistic forecasts offered by the RBA in its most recent statement on monetary policy released in February.
As a starting point, here’s what the NAB is forecasting for GDP, employment growth, unemployment, inflation, the Australian dollar and the RBA cash rate, among others, over the next three years.
Not exactly much to write home about, right?
“Our framework shows a moderate cyclical recovery in domestic demand, and to a lesser extent GDP, in 2019,” the NAB says.
While it sees Australian GDP growth stuttering near-term as a result of Cyclone Debbie before rebounding higher on the back of stronger commodity export volumes later in the year, its view moving into 2018 and beyond is cautious to say the least.
“(Growth is likely to slow) to 2.3% year-on-year by December 2018, as dwelling construction and LNG exports peak and weak household income constrains household consumption,” it says.
“This oscillating outlook in 2017 and 2018 sees few inroads made in unemployment — remaining around 5.75% — or much pick up in underlying inflation, before 2019 sees a modest fall in the unemployment rate to 5.5% and a small rise in underlying inflation to the bottom of the RBA’s 2-3% range.”
It also sees the spike in Australia’s terms of trade as a result of higher commodity prices reversing over the period ahead, an outcome that will likely drag down nominal GDP growth and with it national incomes.
So much of the same as to what has been seen in recent years, and hardly the conditions that warrants tighter monetary policy from the RBA in the near-to-medium term, in its opinion.
“The RBA is an inflation-targeting central bank first and foremost,” it says.
“Rate hikes are highly unlikely in our view given forecasts which see the unemployment rate elevated for a considerable period, and for underlying inflation to remain below or just on the bottom of the target band.
“Equally, further rate cuts may act to counteract any macro-prudential measures to address household balance sheet risks and are unlikely in the current environment.
“As such, while the RBA’s concerns around household balance sheets are unlikely to be alleviated quickly given recent strength in property prices in Melbourne and Sydney, it is unlikely that the RBA will use the cash rate to address these risks.”
Given those counteractive forces, the NAB doesn’t see the RBA lifting the cash rate until 2019 at the earliest, suggesting that this will only occur once the bank sees a gradual cyclical recovery in domestic demand that’s accompanied by a lift in inflationary pressures and reduction in the unemployment rate.