From Westpac’s Bill Evans:
This result will come as a disappointment to the Reserve Bank. Note that the forecast for GDP growth in 2018 for which appeared in the November Statement on Monetary Policy was 3.5%. With the first three quarters of the year totalling 2.2% the December quarter would have to print growth of 1.3% (a 5.2% annualised growth pace) – a highly unlikely event. We can expect the Bank to lower its forecast for GDP growth in 2018 from 3.5% to 3.0% when it next releases its forecasts on February 9 2019.
That forecast will then challenge the 2019 forecast of 3.25% which appeared in the November Statement. It was reasonable for the Bank to assume some slowing between 2018 and 2019 (Westpac’s growth forecast for 2019 has been 2.7%) particularly with a more clouded outlook for global growth and a likely accelerated contraction in residential investment. (Note new dwellings contracted by 0.8% in The September quarter following two quarters which averaged 3.2% in March and June). That would immediately push the likely 2019 forecast back to around Westpac’s forecast of 2.7%.
So, this print is likely to change the Bank’s growth rhetoric of strongly above trend to slightly above trend drifting back to trend in 2019.
Westpac has consistently forecast that the cash rate would remain on hold through 2019 and 2020. If we are right that the Bank will revise down its growth forecasts on the basis of this result then lower expected growth momentum going into 2020 may also temper the Bank’s attitude to rates in 2020 as well.
Capital Economics agrees:
Even if GDP growth rebounds to 0.6 per cent q/q in the fourth quarter, it would only increase by 2.9 per cent this year.
That’s much weaker than the RBA’s forecast of a 3.5pc increase, and we believe that the full effects of falling house prices and tighter credit conditions have yet to be felt.
The upshot is that we expect GDP growth to slow further to 2.5 per cent in 2019, which is lower than the consensus of a 2.8 per cent increase.
That’s a lot more polite than I would be. The RBA is facing tumbling growth in H1 2019 as the housing bust combines with the NSW and federal elections to stall the economy. I see growth at sub-2% by mid-2019 threatening a weakening jobs market and a feedback loop into house prices.
I don’t know whether the RBA has played a confidence gambit or actually believes it’s own rubbish but rate cuts are coming.
