This is two days old now but is worth revisiting:
There are two main changes in our Australian economic forecasts.
Firstly we have shaved our 2015 GDP growth by 30pps from 2.3% to 2.0%. This compares with consensus forecasts for 2.9%. The core themes behind our bottom-of-consensus forecasts that we held through 2014 appear to be still the central themes;
1. A terms of trade shock from lower commodity prices driving nominal income growth back towards stall speed.
2. A household income shock as an uncompetitive exchange rate and labour costs coalesced with ‘cost out and capital return’ strategies for corporates and excess supply of labour.
3. The mining investment shock to arrive sooner, to be more prolonged and to have greater spillovers to the rest of the economy than consensus expectations creating an ‘air-pocket’ for activity growth ahead of the long expected ramp up in LNG volumes.
4. A fiscal shock as the government commenced its medium term strategy to return the Budget to surplus.
5. The impetus to economic growth from new housing investment would start to fade by end-2014.
The GDP growth revision reflects 5 main factors;
1. Weaker major trading partner growth, specifically in Japan, and to a lesser extent China and Europe.
2. Sharper falls in commodity prices than our previously baseline assumptions incorporated.
3. A higher probability of an El Nino weather pattern in Australia in 2015 resulting in drought conditions in Eastern Australia.
4. Financial conditions have tightened appreciably since the start of 2014, primarily due to the exchange rate remaining elevated into falling commodity prices. However, faltering equity prices and widening corporate bond spreads have also contributed.
5. Our real time measures of non-mining economic growth suggest the recovery in the non-mining economy remains tepid.
There are few signs of non-mining investment accelerating in the near term, housing investment growth looks set to slow, government demand growth appears set to remain strained and consumers are showing few signs of embarking on a materially stronger growth path.
Solid population growth, rising productivity and very strong growth in resource export volumes support the case for medium term optimism; nevertheless, the growth outlook for 2015 remains challenging in our view.
Secondly, we have removed our forecast rate hike in late 2015 and now expect the RBA to commence raising interest rates March 2016 (was November 2015). We now see the peak in interest rates as 3.75% by end of 2017, with rates expected to remain on hold in 2018 as the economy is expected to cool again as monetary policy tightening impacts. The rationale for removing our end-2015 rate hike from the forecast profile reflects;
1. The weaker growth outlook for 2015 noted above, which leaves our GDP forecast 90pps below the current consensus view.
2. Our expectation that inflation pressures will continue to abate. Our forecast since early 2014 was that headline CPI would move below the bottom of the RBA target range of 2%-3% upon the release of the December 2014 data; and this remains our expectation. We also expect underlying inflation to move to the bottom of the RBA range through 1H15.
3. Our expectation that the unemployment rate will continue to drift upwards. We have lifted our forecast or the peak in the unemployment rate from 6.25% to 6.50%. We expect this peak to be reached in 2H15.
4. The introduction of additional macroprudential policies will provide the RBA with some additional flexibility which in conjunction with likely new capital rules for banks will likely require less need for interest rate normalisation to occur in 2015. We continue to ascribe a high probability that the RBA could still ease interest rates in 1H15, although our base case is that the RBA remains on hold in 2015. Catalysts for change in our rate view are easy to identify, and include; major trading partner growth continuing to disappoint, commodity prices continuing to decline sharply, the government’s fiscal plans embracing higher taxes or lower expenditure to make up for falling revenue, or should the exchange rate become hostage to new bouts of capital inflow from excess liquidity from abroad.
That is, in effect, a domestic economy in recession but disguised by population growth and export volumes.
