HSBC’s chief economist, Paul Bloxham, has just lowered his growth forecast and is arguing for another interest rate cut on the back of the unwinding mining boom and slower than expected rebalancing to other drivers of growth:
– A weaker recovery in Asia, a persistently high AUD and a slower than expected rebalancing from mining to non-mining led growth are weighing on Australia’s growth prospects
– As a result, we have revised down our growth forecasts for 2013 from 2.9% to 2.5% and for 2014 from 3.1% to 2.8%
– The recent AUD depreciation should help support growth, but another RBA cut may also be needed
Mind the mining gap
As the mining story slows down, other sectors need to pick up to support Australia’s growth. For a while now, our central case has been that ‘Australia’s great rebalancing act’ would be pulled off fairly smoothly (9 December 2012). But there were always risks. The four we highlighted last year were: that the government could have continued its austerity drive and pushed Australia off a ‘fiscal cliff’; monetary policy could be less powerful than expected; that global growth could weaken; and, that the AUD could remain too high.
The first risk was a non-event. The government backed away from its ‘fiscal austerity’ plans and the budget is now supportive rather than contractionary. On the second risk, there were strong signs that monetary policy was working early in the year, though more recent data have been less convincing. While the housing market continues to lift, consumer sentiment has turned down recently. The third and fourth risks have also been big challenges. While the US didn’t drive off the ‘fiscal cliff’ and the euro didn’t implode, China’s recovery has been weaker than expected and Asia’s growth has been lacklustre. Until recently the AUD had been around 30-year highs, despite lower commodity prices.
These factors have conspired to drive a weaker than expected Q1 GDP print for Australia and the more timely indicators have also been on the weaker side recently. While the Q1 GDP numbers were only a little weaker than expected (+2.5% versus a market expectation for +2.7%) the components revealed that the pace of rebalancing has been slower than expected. In particular, the household saving rate has remained high despite the 200bp of rate cuts the RBA has already delivered. The exchange-rate sensitive industries, including manufacturing, have also been weak as the high AUD constrained their activity.
As a result, we are revising down our GDP forecasts for 2013 from 2.9% to 2.5% and for 2014 from 3.1% to 2.8%. We still expect rebalancing but there is likely to be a mild mining gap. The recent AUD depreciation should help support the ‘rebalancing act’, but we now think the RBA may need to cut rates a little further to support growth.
Full report below.
