Kouk: RBA gunna cut interest rates later this year

Via the Kouk earlier this week:

Do we need to be worried about Australia’s economic outlook?

The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy over the next year or two.

This is disconcerting news for everyone out there with a mortgage or a small business loan, especially in a climate where the business sector is doing it tough and when wages growth is floundering near record lows. The good news is that the RBA is likely to be wrong and the next move in interest rates could be down, such is the run of recent news on the economy. Failing an interest rate cut, the hard economic facts suggest that any interest rate rises are a long way into the future and if they do come, there will not be all that many.

At this point, it is important to bring together the issues that would need to unfold to see the RBA pull the lever to hike interest rates. At the simplest level, the start of an interest rate hiking cycle would need to see annual GDP growth above 3.25 per cent, the unemployment rate falling to 5 per cent and less, wages growth lifting towards 3 per cent and more and underlying inflation increasing to 2.5 per cent.

This is where the RBA expectation for higher interest rates is on very thin ice.

In terms of GDP growth, there is nothing in the recent data to suggest 3,25 per cent is on the cards. In two weeks, the March quarter GDP data will be released and they are likely to show annual growth around 2.75 per cent, which is much where is has been for the last few years. With retail sales also soft, building approvals trending lower, some government infrastructure projects coming to an end and net exports more neutral than positive over the next year, bottom line GDP is set to remain below 3 per cent right through to 2019.

The recent labour force data are showing the unemployment rate going up. It reached 5.6 per cent in April, to be higher than it was in May 2017. With job advertisements starting to track lower, it seems more likely the unemployment rate will hit 6 per cent, not the 5 per cent rate the RBA is banking on.

This weakness in employment will inevitably feed back into wages, which are also showing signs of slowing, not picking up. Over the last two quarters, annualised wages growth has been just 2.0 per cent, down from 2.2 per cent recorded in the June and September quarters 2017. Weak wages growth is hurting consumer spending and holding back bottom line growth. In terms of inflation, it remains well in check with sub-trend economic growth, rising unemployment and weak wages all feeding into a below-target inflation rate.

At one level, it is to be hoped the RBA is correct and the economy gains momentum, wages growth increase and eventually interest rates need to rise. That is because the economic news would be universally good.

The recent facts suggest this is a long shot.

If the economy keeps muddling along much as it has over the past year or so, the RBA will be on hold for a m=long time to come. If there is any downside at all from the current sluggish growth, rising unemployment, low inflation dynamics, the RBA will cut interest rates.

It wont happen soon, but the odds are slowly narrowing of a move before year end.

Good job, Kouk. Add the incipient Chinese slowdown and lower bulk prices over H2.

The next move remains down and the quicker we can get to zero interest rates then the quicker we get on with ending this thing.

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About the author

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.