Goldman has pushed its next rate cut back today from March to August but remains bearish:
Policy focus: Delaying our forecast rate cut and the first hike
Post the 4Q2014 CPI report, is Australia’s easing cycle done and dusted? We think not. Ultimately, weather anomalies have temporarily distorted the data, underlying inflation is around the mid-point of the RBA’s target band, inflation expectations are near a 20-year low, domestic demand remains tepid, employment is contracting, and the biggest challenge of Australia’s long expansion – the normalization of the commodity prices and investment booms – lies ahead in 2014 and 2015. Too much inflation is not the problem and, in our view, too little demand still presents as the central risk. That said, the 4Q2013 CPI report does complicate the communication of a near-term rate reduction, so we have pushed out our forecast cut to July (from March). We have also pushed out our forecast commencement of the tightening cycle to 2Q2015 (from 1Q2015), in part owing to a slower-than-expected ramp-up of LNG exports.In this note we reassess the outlook for investment and the transition to export growth across the Australian economy. On the investment side, the net effect of delays/cost blow-outs at key LNG projects, the completion of construction at several major iron ore mines, and timing of a likely surge in public infrastructure spending leaves our bottom-up investment model consistent with an c.1.5pp headwind to real GDP growth in 2014. While on the exports side, a bottom-up approach to modeling each major export component presents downside risk to our bullish top-down baseline forecast for +8.5% p.a. growth in exports over the forecast period – and particularly given material downward revisions to the pace of the ramp-up of production at key LNG projects. To be clear, we are still very upbeat on the outlook for Australian exports, but we now see the risks as skewed towards the transition from construction to production taking longer than previously estimated. In turn, a more modest contribution to GDP from net exports will keep the focus on the pace of recovery in the non-mining economy and risks delaying the return to above-trend GDP growth to well into 2016. All things equal, this will keep downward pressure on rates – and particularly given that we expect the risks to nominal GDP will be compounded by negative commodity price dynamics in the interim.
Took the words right out of my mouth.
