The reasons why the RBA’s move will be downward

Australia has had a restrictive fiscal policy compared with the US and consumers are suffering a squeeze on their discretionary spending, Morgan Stanley Australia conference has heard.

Minack Partners founder and former Morgan Stanley strategist Gerard Minack.

The Reserve Bank is expected to cut interest rates by the end of the year or early next year as they start to have more impact on the economy, economist Gerard Minack has told the Morgan Stanley Australia conference.

Although the Reserve Bank had not tightened rates as much as the US Federal Reserve board and some other central banks, he said that the impact of higher rates on the Australian economy was stronger given the high levels of household debt.

“If you look at the impact on cashflows, in the US the household debt service burden is effectively unchanged,” he said on Wednesday.

“In Australia, household debt servicing is up 7 per cent. It’s a massive whack over the head.”

A former strategist with Morgan Stanley, Mr Minack said Australia had a restrictive fiscal policy compared with the US with consumers now suffering a squeeze on their discretionary spending.

“If you don’t have a mortgage, you are probably renting, and that is taking a bite out of your income,” he said. “Policy is tight here and you are starting to see labour markets loosening.

“That will open up the RBA to the prospect of rate cuts later this year or early next year.”

He said he expected there would be further downgrades in the outlook for the Australian economy later in the year.

Mr Minack, who now has his own consulting firm, Minack Partners, said the US economy was headed for a “soft landing” next year as higher interest rates started to bite.

He said that the US would avoid a recession because there were no major financial imbalances in the economy and the US Federal Reserve board would start cutting rates later in the year.

Mr Minack said the US economy had been much more resilient than expected because of the extent of fiscal stimulus.

“We have seen the strongest rebound from a recession in the post-war period because of the fiscal stimulus over the past few years,” he said.

“There are obvious reasons why the US economy has been resilient, but I think we are heading into a slowdown.”

He said the US had been the “standout economy” in the world, despite the big increase in interest rates.

“At the start of last year, there was a lot of chatter about potential recession,” he said.

“There were some downgrades to forecasts, but since the middle of last year we have seen consecutive upgrades.”

He said the outlook for the European economies was being downgraded and he expected there would be further downgrades of the outlook for the Australian economy.

Mr Minack said the US economy had been performing much stronger than expected because its consumers had a “nice little piggy bank of unspent stimulus cheques (from the government)”.

But he said US consumers were running down this savings buffer and the combination of this and higher interest rates would lead to a “soft landing” in the US next year.

Mr Minack said the old days when former Federal Reserve board chairman Paul Volcker had pushed the US economy into recession to get inflation down were over.

“If you look at every other cycle since, no Fed has wanted to deliberately push the economy into recession,” he said.