06/03/2019 - 12:53

Chances of RBA cut grow as GDP falls short

06/03/2019 - 12:53

Bookmark

Save articles for future reference.

The Reserve Bank of Australia's stance on rates may be getting a little less neutral after Australian economic growth fell well short of the central bank's own downgraded forecast.

Chances of RBA cut grow as GDP falls short
Seasonally adjusted final demand for WA in the December quarter decreased 0.3 per cent.,

The Reserve Bank of Australia's stance on rates may be getting a little less neutral after Australian economic growth fell well short of the central bank's own downgraded forecast.  

Governor Philip Lowe started Wednesday by giving a speech in which he said Australia's record low 1.5 per cent cash rate was clearly stimulatory, but the Australian Bureau of Statistics released data just hours later showing the economy only grew 2.3 per cent in 2018.

That compares to the RBA's forecast of 2.75 per cent made just four weeks ago, and prompted more warnings from economists that the bank will be forced to cut the cash rate before the end of 2019.

Seasonally adjusted expansion was 0.4 per cent in the three months to December.

In Western Australia, seasonally adjusted final demand in the December quarter decreased 0.3 per cent, the largest decrease among every state and territory except for the Northern Territory, with non-dwelling construction the largest detractor from growth.

For the year, WA's seasonally adjusted final demand decreased by 1.6 per cent. 

Economists from Westpac and AMP expect two 0.25 per cent rate cuts - in August and November - while JP Morgan is even more aggressive, flagging cuts in July and August.

JP Morgan strategist Sally Auld said a sharp second-half slowing in growth to an annualised 1.0 per cent or so had lowered the starting point for the RBA's forecast of 2.5 per cent annual growth by June and of 2.75 per cent by December.

She tipped the RBA to lower its forecasts in May's statement on monetary policy to between 1.75 and 2 per cent for the 12 months to June, and to between 2.25 and 2.5 per cent for the year to December.

"If the RBA board believes that the outlook for economic growth is no longer consistent with lower unemployment and higher inflation, then the case for rate cuts is uncontroversial," Ms Auld said.

"Given the magnitude of revisions required to the RBA’s GDP forecasts for 2019 in light of today’s numbers, we lean strongly in this direction."

The RBA cut the cash rate to a record low 1.5 per cent in August 2016 and it has remained there since.

Ms Auld did, however, note that her outlook could change if there is sizeable household stimulus in the April 2 federal budget.

Household final consumption expenditure increased 0.4 per cent during the December quarter, the third time in a year it has been 0.4 per cent or lower.

Westpac economist Andrew Hanlan noted annual consumer spending growth of 2.0 per cent was the lowest since 2013.

"Expecting a lift in the growth momentum from one per cent to three per cent could only really be justified if the economy was expecting to benefit from a significant stimulus," Mr Hanlan said.

"But global growth is slowing; the residential construction cycle has clearly turned; the AUD remains in a stable range; monetary policy is on hold and fiscal policy will continue to be constrained by the perceived need of both political parties to predict a surplus in 2019-2020."

The Australian dollar dropped from US70.88 cents just before the data was released at 1130 AEDT to a two-month low of US70.29 cents in afternoon trade.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

Subscription Options