There are still plenty of inputs to arrive, but it looks like Australian economy spluttered its way through the first three months of the year.
“While data remains scarce, what we have for Q1 suggests our 0.5% forecast may be too high,” the bank’s Australian economics team wrote in a note released on Friday afternoon.
“While private capital expenditure is finally on a recovery path, consumer spending looks weak, residential work has fallen and net exports look set to drag significantly as imports have jumped and exports fallen.”
Like ANZ, UBS’ downgrade is centred partially around weakness in household consumption given the paltry 0.1% increase in retail sales volumes reported in the March quarter.
This chart from UBS shows that where retail volumes move, accounting for around a third of household spending, consumption levels tend to follow.
In response to this weakness, UBS has slashed its real GDP forecast for the March quarter, predicting growth of just 0.2% leaving the year-on-year rate at a seven year low of 1.5%.
They believe that the risks to that view are to the downside, ensuring that there’ll be plenty of interest in upcoming GDP inputs, starting with private business capital expenditure figures next week.
Should a soft GDP result ensue as it expects, UBS says that it will have implications for the RBA whose current forecasts are looking for another solid quarterly result.
“For the RBA, a Q1 GDP print of around 0.25%, rather than its implied forecast of 0.7%, will likely see it lower their mid-17 forecast by a significant 0.5 percentage points to 1%-2%, from 1.5%-2.5%,” it says.
That could potentially lead to weaker inflationary pressures and labour market conditions if sustained, and will potentially increase the risk that the RBA may have to ease policy again despite a reluctance at present.