Recent data clearly shows that the pace of growth is slowing, with weakness in retail, car sales, resi & non-resi approvals, business surveys, home loans & credit. Indeed, the only major ‘positive’ data print in the last month has been unemployment, & while jobs growth remains solid at 2.2% y/y, it has slowed significantly in the last year. We now expect growth to slow below trend in 2019 & 2020 (UBSe 2.3% & 2.4%), dragged by soft consumption & falling residential construction. This should see employment growth ease to 1.5% y/y, with participation remaining around recent highs (thanks to continued migration) and unemployment rising to 5.2% by end-19 & 5.4% by end-20.
…In Governor Lowe’s speech this week, the RBA made a clear shift to ‘neutral’ with Lowe firmly putting the trigger for a rate cut on the labour market – “In the event of a sustained increase in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point”. Given our below consensus view for GDP, and now employment, we expect the RBA to cut in Nov-19, & again in H1-20 as unemployment begins to drift higher in H2-19.
That’s the thin end of the wedge. Flagging consumption will be worse still for jobs and unemployment numbers rise more and earlier than UBS expects. RBA to cut twice this year then twice more in 2020.
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.
