Spending outlook, jobs key indicators for central bank to move

The Reserve Bank has cut its outlook for economic growth to 2.75 per cent for this year and next as it considers what to do on interest rates.

The Reserve Bank has cut its outlook for household spending as the nation tightens the purse strings amid falling home prices and low wages growth.

Australia’s central bank is also keeping an eagle eye on any signs of weakness in the jobs market as it weighs up whether it should cut interest rates to spur the economy, its latest economic report card shows.

The update assessment comes after the RBA board, at its monthly board meeting on Tuesday, kept the cash rate on hold at its historic low of 1.5 per cent.

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Its latest quarterly statement on monetary policy, released on Friday, confirms the RBA has cut its outlook for economic growth to 2.75 per cent for this year and next.

That is down from the 3 per cent growth the RBA forecast in December and well off the 3.5 per cent it expected in November.

“Consumption growth has slowed noticeably, especially for those discretionary items that tend to be correlated with housing conditions,” the central bank said on Friday.

“Residential construction activity has declined from its very high level over recent years.”

Economic growth came in at 2.3 per cent in 2018 but flatlined at 0.2 per cent in the three months to December.

Reserve Bank of Australia governor Philip Lowe. Picture: AAP

The RBA’s downward revision brings the economic forecast in line with those provided in the federal Budget, which has gross domestic product running at 2.75 per cent over the next two financial years.

Growth in household disposable income slowed to 2 per cent last year, well below its long-run average, the central bank’s latest report card shows.

“Weaker housing market conditions and income growth are likely to continue to drag on spending,” the RBA says.

“The prospect of continued low growth in household disposable income remains a key risk to the outlook for household consumption, especially given high levels of household debt and the need to service that debt.”

Underlying inflation, which strips out volatile price movements, is forecast to come in at 1.75 per cent this year and 2 per cent next — down from an earlier prediction of 2 per cent and 2.25 per cent.

The RBA said its most recent board meeting had focused on what lower-than-expected inflation meant for the economy going forward.

“It concluded that the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the (2 per cent to 3 per cent) target,” its report says.

“Given this assessment, the board will be paying close attention to developments in the labour market at its upcoming meetings.”

AMP chief economist Shane Oliver said the RBA “has effectively lowered its hurdle for a rate cut to be the absence of a further decline in unemployment, from being a rise in unemployment.”

Most economists expect the RBA to cut the cash rate by 0.25 percentage points in August.

The RBA observes there should be room for banks to lower mortgage rates even without it taking further action.

It notes that the “interest rates at which banks raise long-term debt funding have declined to record lows” while “banks have reduced interest rates on retail deposits”.

“Bank bill spreads are now at their lowest levels since late 2017, though this has not flowed through to most advertised mortgage rates,” its report says.

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