This analyst says the RBA will cut rates to 1.5% and unemployment will rise to 7.5%

Tighten your belts. Picture: Getty Images

Australia is struggling to cope with the commodity collapse, according to Paul Dales, Capital Economics’ chief Australia and New Zealand economist.

Dales says that the outlook for Australia and New Zealand “is bleaker than we formerly thought”. His forecasts show that Australian growth will slow to 1.8%, dragging underlying inflation through the bottom of the RBA’s 2-3% range.

Unemployment will also be higher as a weak economy fails to create the expected jobs, driving the unemployment rate from the current 6.4% to 7.5% in 2016.

The RBA won’t have any choice but to react aggressively by cutting rates to 1.5%.

Looking deeper Dales says that:

…the slowdown in GDP growth will be reflected in a slowdown in employment growth, from 1.0% both last year and this year to around 0.5% next year. That’s equivalent to average monthly job gains of fewer than 6,000.

This means that given population and workforce growth, which has been averaging around 15,00 per month over the past two years, there will be a “surge in the unemployment rate to 7.0% by the end of the year and to 7.5% next year”.

That is well above RBA and market expectations with most forecasters seeing a peak in the 6.5% – 6.75% this year before unemployment starts to fall.

If Dales is right, it will also put more downward pressure on wages growth which will further dent consumer confidence and hurt domestic growth.

That means the RBA is going to need to cut and cut hard.

Dales forecast is “that GDP growth will be weaker than the RBA expects and underlying inflation lower suggest that rates may be cut to 1.5% this year and stay there next year. The next cut could come in March, if not May.”

Recent data flow has confirmed the RBA acknowledgment that monetary policy has less traction than in the past. So the chances that Dales’ gloomy forecasts are right seems to be growing.

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