Economy in reverse feared but RBA bets on rebound

The RBA is betting the softening in the economy expected to be revealed in the national accounts is only temporary.

The Reserve Bank is betting the softening in the economy ­expected to be revealed in today’s national accounts will be only temporary and will be followed by a return to healthy growth in 2017.

Bank economists are tipping today’s September quarter ­national accounts will show the economy contracted, following a run of weak reports on business investment, retail sales and housing construction.

A small contraction in the ­September quarter could drag the annual growth rate down from the 3.3 per cent in the year to June to less than 2.5 per cent. The RBA board left its cash rate at the ­record low of 1.5 per cent at its final board meeting for the year, with governor Philip Lowe saying this was “consistent with sustainable growth in the economy” and would eventually pull inflation back from its current low level to the bank’s 2 to 3 per cent target band.

Dr Lowe foreshadowed a weak September quarter GDP figure, saying “some slowing in the year-ended growth rate is likely, before it picks up again”.

The recovery in growth would be helped by a lift in resources ­exports as LNG projects were completed, while Dr Lowe noted that indicators such as job advertisements and vacancies suggested employment would continue growing for the immediate future.

The Reserve Bank has also ­become more optimistic about the global outlook. It does not see the recent surge in commodity prices as a speculative bubble, saying it reflects both stronger ­demand and cutbacks in supply in some countries.

Rising commodity prices have also helped to lift depressed rates of inflation, which have been below central bank targets around the world. “Globally, the outlook for inflation is more balanced than it has been for some time,” Dr Lowe said.

While financial markets are betting that the Reserve Bank will keep its cash rate steady at 1.5 per cent for at least a year, market economists expect continuing weak inflation and growth will force further rate cuts.

The Australian Bureau of Statistics reported yesterday that federal and state governments had cut back their current spending and capital investment in the September quarter while the export performance was much weaker than expected.

JPMorgan chief economist Sally Auld said the national ­accounts would show growth was weaker than the Reserve predicted last month and would force it to revise its forecasts lower in its next quarterly update. With inflation still depressed and not expected to return to the 2 to 3 per cent target range for some time, she said further downward revisions in economic growth next year would make it hard for the Reserve to keep rates steady.

“We still see scope for lower rates in 2017 and expect 50 basis points of easing from the Reserve Bank in the first half year,” she said.

National Australia Bank chief markets economist Ivan Colhoun said the softening in the NSW economy and weaker retail and employment trends across the country could cause the economy to “stall”.