ANZ has revised its forecasts, now tipping lower GDP growth and weaker income growth, but curiously still forecasts 100 basis points of interest rate rises from November 2015:
We have revised down our growth profile for Australia, and now expect slightly softer growth in 2015 and 2016 of 2.9% and 3.2% respectively. This new forecast incorporates recent sharp downward revisions to our iron ore price forecast, and has seen us take around 1ppt off our nominal GDP forecast and around ¼ppt off real GDP growth.
Lower commodity prices will weigh on profits and wages, while also reducing both company taxes at the federal government level and royalties at the state level. They will in turn constrain consumer spending and business investment, and lead to an extended period of weaker than usual growth in public demand. Importantly, these revisions represent a delay in the return to trend growth rather than a change in the trajectory of the Australian economy.
With lower growth and little inflationary pressure, the RBA has scope to keep monetary policy accommodative for longer. Accordingly, we have revised our cash rate forecasts. We still expect a new tightening phase to commence next year, but have pushed back the timing of the first rate hike from May to November. We expect 100bps of rate hikes over the following year to take the cash rate to 3.5% by the middle of 2016…
While we continue to look for a very sharp decline in mining investment over the next couple of years, strongly increasing resources exports will provide an offset. We expect net exports to contribute around 1.5ppt to growth in 2015, and 1ppt in 2016.
…below-trend growth is likely to see the unemployment rate tick up marginally and then stabilise at around 6¼% through 2015, before declining very gradually through 2016…
APRA could [also] possibly introduce some sort of soft macroprudential controls in an attempt to take the heat out of the investor segment of the housing market.
This is perverse reasoning to me.
By ANZ’s own admission, the domestic economic outlook has weakened owing to the larger than expected fall in commodity prices, which are expected to drag down national income (and wages growth – already at record lows) even further. Meanwhile, the “sharp decline in mining investment over the next couple of years”, which is employment intensive, is to be offset by increasing resource export volumes, which employs hardly anybody. Add to these factors the likely implementation of macro-prudential controls on mortgage lending, and the tightening of foreign property investment into established dwellings, and how exactly does this add up to a 1% rise in interest rates?
HSBC is out today with similar analysis on interest rates:
Looking into 2015, we remain of the view that the fundamentals are in place for a continued rebalancing of growth. Population growth is strong; finance is readily available at low cost, infrastructure investment is set to ramp up in 2015, a massive rise in LNG exports is expected in 2015, and increasing ties to Asia are expected to support Australia’s growth (HSBC expects China GDP growth of 7.7% in 2015). The main challenges to our view are that mining investment has further to fall in 2015, commodity prices have declined further, and the government will need to consolidate its fiscal position over time.
Weighing up these forces, we still see the RBA’s next move as more likely to be up than down, although we expect it to remain on hold until at least mid-2015. We still have a rate hike pencilled in for June 2015, but the clear risk is that it hold steady for longer.
I strongly disagree with these views as well. After an extended pause, the next move in interest rates will be down and they will head significantly lower over the medium term as commodity prices (the terms-of-trade) slump, mining investment crashes, housing construction slows, the local car industry closes down, and controls are placed on housing speculation (both domestic and foreign).
