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RBA Slashes Near-Term Growth Outlook as Employment Key to Rates


Friday, 10 May 2019 08:57 WIB

RBABank Sentral Australia,Reserve Bank of Australia


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Australia's central bank slashed its near-term growth outlook and is relying on persistent jobs market strength to cushion a property-driven downturn in household spending.

The economy is expected to expand 1.75% in the year through June versus 2.5% seen three months earlier, and is then forecast to lift to 2.75% for the rest of the forecast period, the Reserve Bank said in Sydney Friday. It made substantial cuts to the outlook for consumption and dwelling investment despite all forecasts being premised on two cuts in the cash rate.

“Growth in the Australian economy has slowed and inflation remains low,” the RBA said in its quarterly Statement on Monetary Policy. “Subdued growth in household income and the adjustment in the housing market are affecting consumer spending and residential construction. Despite this, the labor market is performing reasonably well, with the unemployment rate steady.”

The central bank opted against easing policy Tuesday as it waits to see whether the persistent hiring strength of the past two years is maintained. It signaled full employment is likely lower than in the past, saying unemployment can fall further than the current 5% without setting off consumer-price growth.

“At its recent meeting, the board focused on the implications of the low inflation outcomes for the economic outlook,” the RBA said. Core inflation is “expected to remain low in coming quarters, largely because the weakness in housing- related items is expected to persist for a while.”

It did offer some prospect of improvement for the financial position of households.

“Disposable income growth is also expected to be supported by lower net interest payable owing to the lower cash rate assumption,” it said. 

The central bank has kept its cash rate at a record-low 1.5% since August 2016 and noted in today's release that money markets are pricing in quarter-point cuts this year and next.

In its statement, the RBA cut its household spending forecast in the 12 months through June to 1.6% from 2.2% in February; it predicted dwelling investment would slump 6% in the period versus a 1.7% drop seen three months ago.

Household spending accounts for 60% of GDP and the bank noted that uncertainty around its outlook is a key risk.

Offshore it highlighted the trade tensions between the U.S. and China, which is also Australia's biggest trading partner.

“The global growth outlook has been revised slightly lower and the risks remain tilted to the downside,” it said. 

“The outlook for China continues to be an important source of uncertainty for the external environment facing Australia’s economy. The Chinese authorities face significant policy trade- offs and it is unclear how various policy changes will play out,” the bank said. “The outlook for trade policy remains uncertain and negative developments could harm global growth. 

Source : Bloomberg


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