How long can HSBC’s Paul Bloxham hold the line on rate hikes?
Weaker than expected Q3 GDP and falls in commodity prices have prompted us to cut our GDP forecasts for 2015
* We still expect growth to continue to rebalance from the mining to non-mining sectors, but now see GDP growth of 2.8% in 2015 (previously 3.2%), rising to 3.2% in 2016 (previously 3.0%)
* We still expect that the RBA’s next move will be up, but now expect the first hike to be in Q4 2015 (previously Q2 2015)
MINING SLOWING, AS NON-MINING ACTIVITY GRADUALLY LIFTS
Australia’s economy is still running in second gear. Although there are clear signs that growth is rebalancing from mining investment-led growth towards the non-mining sectors and that resources exports are ramping up, the transition between the sources of growth has only been gradual.
Low interest rates are continuing to lift housing market activity, and support retail sales, and are also a factor that has contributed to a recent improvement in business conditions. But, at the same time, the steep decline in mining investment, that has long been expected, is now well underway and has further to run. The recent fall in commodity prices, particularly iron ore prices, has also been a drag on national income. This is particularly the case because the AUD has not played its usual role as a shock absorber, having remained high in the face of falling commodity prices.
With activity rebalancing only slowly, GDP growth has remained below trend in 2014. Although we had been expecting growth to remain below trend in 2014, the latest GDP numbers for the third quarter did surprise us a little to the downside, running at 2.7% y-o-y (the market had expected 3.1% y-o-y and HSBC had 2.9%).
As a result of lower commodity prices, recent downward revisions to our outlook for key commodity prices and the lower starting point for GDP, we are revising down our GDP forecasts for 2015. We now expect GDP growth of 2.8% for 2015, which is a little below our estimate of trend growth (around 3.0%). We expect growth to pick-up more strongly from H2 2015 and have revised up our 2016 GDP growth forecast from 3.0% to 3.2% as we expect the momentum in the non-mining sectors to continue to build.
For the RBA, we expect that this will mean a longer period of stable rates and we now expect them to be on hold until Q4 2015 (previously Q2 2015). We maintain our long-held view that the RBA is unlikely to cut interest rates further.
I suggest a low key rollover in the quiet early weeks of the new year.
