Reserve Bank cuts GDP and consumer spending forecasts

The RBA has cut its forecast for GDP growth and household spending, further strengthening the case for a rate cut.

RBA governor Philip Lowe. Hollie Adams/The Australian

The Reserve Bank of Australia has revised its forecasts for economic growth and household spending sharply lower, underscoring risks that the next move in interest rates might be downward.

In its quarterly Statement on Monetary Policy, the RBA said it now sees the economy growing by just 2.5 per cent in the year to mid-2019, down from an earlier expectation of growth of around 3.25 per cent.

GDP growth will then recover to 3.0 per cent for calendar 2019, it said.

The Aussie dollar, already down about 2.5 per cent this month against the US dollar, dropped another third of a US cent on the revised forecasts. The Australian dollar, which was worth US72.95c on January 31, slipped from US70.99c just before the statement was released to US70.65c at 12.20pm (AEDT).

Given falling house prices, soft wages growth and record debt, consumer spending has emerged as the biggest uncertainty for the economy, with the RBA forecasting household consumption growth of 2.2 per cent in the year to mid-2019, down from a forecast in November of 3.0 per cent.

The downgrades follow comments Wednesday by RBA Governor Philip Lowe that the outlook for interest rates is now evenly balanced.

The RBA has held its benchmark rate at 1.5 per cent since mid-2016, with the central bank signalling until recently the next move would likely be up.

Forecasts for dwelling investment were also sharply revised lower Friday, with the RBA forecasting a 4.5 per cent fall in the year to 2019, compared with a prior forecast of 2.4 per cent fall.

Trimmed mean inflation is expected to rise at a glacial pace over coming years to 2.2 per cent on-year by mid-2021, while unemployment is expected to do the same, only downward.

Financial markets are pricing in the probability that the RBA will lower in benchmark cash rate in the second half of this year.

Still, the RBA is holding out hope that the government’s third quarter GDP report, published in late 2018, which showed the economy growing by a less-than-expected 0.3 per cent on quarter, badly understated the situation within the economy.

“Information from surveys, the bank’s business liaison program and labour market indicators suggest that there was a bit more momentum in domestic demand than implied by the September quarter data,” the RBA said.

The RBA said domestic final demand grew by 2.7 per cent over the year, with positive contributions from most components.

The RBA’s uncertainty over the exact state of the economy comes as more up-to-date data points to a fairly subdued fourth quarter.

New permits to build apartments collapsed through November and December, while readings on business conditions fell alarmingly. Consumer confidence has softened while retail sales nudged up by just 0.1 per cent in the final three months of 2018.

Official fourth quarter GDP growth data will be reported in early March.

One of the few remaining bright spots for the economy is the job market, with the unemployment rate sitting at 5.0 per cent, down from 5.6 per cent a year ago.

The RBA forecasts the jobless rate will fall to 4.8 per cent by mid-2021.

Still, watchers of the economy are left with a weakening picture, that if confirmed through coming data, will see bets on an interest-rate cut increase.

Any rise in the unemployment rate would quickly see the RBA moves to a clear easing bias.

The soft growth outlook also casts uncertainty over the coming federal election, expected in May, and the Liberal-National coalition government’s budget for 2019-20, set to be released in April.

Dow Jones, AAP