NAB today released its official interest rate forecasts for 2013, whereby it is forecasting that Australia’s cash rate will fall by -0.75% to 2.25% by the September quarter of 2013, due to the weakening domestic economy. From NAB’s release:
With the economy continuing to weaken and unemployment set to rise noticeably through 2013 the RBA will need to cut significantly further than previously expected in 2013.
We have reviewed our GDP forecasts and currently see 2013 at around 2% (2½% previously) with unemployment rising to around 5¾% by late 2013. That would see, on a no policy change basis, abudget deficit in the $10-15bn range for 2012/13.
We still expect GDP growth of 2.8% for 2013/14 and a touch above 3% in 2014 helped by new ratecuts. However that implies a larger output gap and unemployment remaining elevated (around 5¾ – 6%) with the Government fiscal position near balance.
The weaker activity outlook will also help contain inflation to below 3% even including the carbon tax impact. Nor do we see the AUD offering much relief to a struggling economy.
We have put the first cut in Q1 – where the Q4 CPI outcome in late January will be important as to exact timing. Thereafter we expect the RBA to wait to see the impact of recent policy moves but will need to react further by mid year. We have tentatively put further cuts in May and August.
We now expect a terminal cash rate of 2¼% in the September quarter of this year.
We continue to expect the Australian dollar to track gradually lower during 2013, as the combination of continuing RBA rate cuts and a firmer US dollar weigh on the currency.
Nonetheless our forecast of around parity in late 2013 still represents a strong currency.
NAB contends that the economy finished 2012 in a “parlous state and leading indicators suggest the first half of 2013 is likely to be a difficult period for many firms and households across the economy. Recent readings on retail sales, private sector credit, house prices and job vacancies clearly underline a weak starting point.”
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It also provides the below charts highlighting the slowing economic momentum and deteriorating business conditions:
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The other feature of the Australian economy is the continuation of “its 10 speed nature”. Struggling sectors – such as manufacturing, discretionary retail, construction, wholesale and small transport – continue to underperform. However, there has now been a significant deterioration in mining sentiment – with that sector in November having the worst confidence levels of any sector. Clearly the substantial boost to iron ore prices will help confidence in that sector, albeit we suspect that part of that story may be related to aggressive restocking in China after such a sharp run down in July/August 2012 and also the loss of some Indian supply. But the latter in particular should be easily offset by higher production elsewhere in the world this year and hence we doubt the recent sharp price run up will be permanently sustained. Based on the preliminary survey results for the December quarter activity levels in mining are now in significantly negative territory. Indeed business conditions in both mining and construction are now at record lows for the post GST period (i.e. the lowest in more than a decade).
Because of the lumpiness of resources investments and the substantial increase in supply in the pipeline our base case remains that mining investment will plateau before falling over the coming year and other drivers of economic activity will be needed to ensure ongoing growth in Australia’s economy.
Drawing the above together we clearly see the loss of momentum lowering near term economic forecasts…
Moving out into 2014 we expect growth to be around 2.8% which is unchanged from previous forecasts but relies very much on more stimulatory monetary policy…
Moving into 2015 the different phase of the mining boom is more apparent with domestic demand slowing to quite low growth rates (as mining investment contracts) but broadly offset by higher exports. The latter combination would however see a structural lowering in the demand for (mining) labour given the lower demands on maintaining mines / LNG platforms vis a vis building them. As a result in our forecasts the unemployment rate tends to drift higher again. These patterns are evident in the GDP / Domestic demand and employment / unemployment forecast charts set out below.
Turning then to the global situation, our world outlook looks little changed from previous forecasts albeit some fears re the fiscal cliff have at least been delayed. Also recent moves to delay the timing of Basel 3 liquidity requirements will help ease concerns of further credit rationing. Overall however we still see: the US as gradually improving but only at a growth rate a touch above 2% with further political dramas to come re debt issue; Europe continuing to double dip; and Japan to disappoint. On a more positive note China appears to have stabilised and there may now be some upside risks to the 8% forecast this year. In summary then our latest global forecast of around 3¼% still looks on track…
Our judgement is that the scenario that now represents our base case forecast could be expected to see rates bottom in the range 2 to 2½%. Our point forecast of 2¼% should be seen as being in the centre of that range and still very much data dependent.
On timing the current rate of deterioration of the domestic economy would seem to require a response in the first quarter of 2013. Still, given that there is already a substantial amount of monetary easing coming down the pipeline (175bps in a little over a year) the RBA is likely to move with caution ahead…
Beyond that we see the RBA on hold at this very stimulative policy stance (which will see home loan variable rates at or around the same levels as that achieved during the global financial crisis). Part of the reason for this is the changing nature of the resource boom where mining employment demand will be significantly reduced as the boom moves from the construction to the export phase. That means, while long term GDP growth will be sustained at around 3%, domestic demand will be nearer 1%. All of which means little improvement in the unemployment rate. Tentatively we see the first move up in rates (as a move to start re-establishing more normal policy settings) in late 2014.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
