There’s a growing number of analysts out there who think the Reserve Bank of Australia (RBA) will soon lift interest rates, perhaps as soon as November this year.
George Tharenou, economist at UBS, is not among them, noting that while Australian economic growth is likely to accelerate sharply in the coming quarter, that will only be a temporary phenomenon, seeing growth over the next 18 months undershoot the RBA’s expectations.
We still expect GDP to bounce to 3% year-on-year in Q3, albeit only briefly, reflecting the base effect of a negative quarter in Q3-2016 dropping out. But, this 3% pace overstates the reality of momentum and will likely be close to the peak of growth. Indeed, we still think the economy’s underlying pace is only moderately recovering, with GDP rising to 2.3% in 2017 and 2.7% in 2018 — averaging around its post — GFC trend of 2.5%. However, this contrasts the bullish RBA which expects ongoing acceleration to a booming 3-3.5% year-on-year over the next few years.
While there are plenty of positives emerging for the economy, weak wage, inflation and household consumption in period ahead will, in his opinion, end up thwarting those expectations a near-term rate hike from the RBA.
Macroprudential tightening is still yet to fully hit resilient housing, consistent with our calling the top for activity and price growth. Consumption will be weighed down in the coming year by a fading household wealth effect, when coupled with higher energy prices. Importantly, we called the trough of wages due to the minimum wage hike, but the pick up ahead will disappoint relative to stronger jobs. When coupled by the Amazon impact and re-weighting, this limits the rise in CPI. A new upside risk is booming public demand spills over to private capex, given the recent sharp lift in capex intentions and non-residential approvals, amid booming business conditions and better global growth lifting exports. A downside risk is house prices fall. Overall, the hawks looking for a near-term RBA hike will be disappointed.
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