UBS folds: RBA to cut interest rates as unemployment spikes

George Tharenou at UBS has finally joined MB:

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.


      • And land prices.

        And because I think the currency will fal much less than people expect, I think property will rocket harder, as more foreigners recognise that this is still a good place to stash money, fix risk diminished.

      • Sic semper tyrannis

        So awesome – I reckon people will buy more of our gas because its cheaper, and Iron ore of course – and Universities will be able to ramp up exports of ….no,,,….wait hang on – absolutely nothing will happen except the very same volume will be sold and we will simply have our terms of trade smashed.


        Things that will of course increase in sales are things which are manufactured and elastic competing in the international market place – washers, dryers, clothing, cars – we make heaps of this stuff so we will export more and …..

        No wait – none of that will happen either.

        Basically in a resource economy like ours a lower currency does massive damage and has zero benefit in increased exports.

        Trololo lolo lol lolo lol….

        Hit it

      • proofreadersMEMBER

        Except on currency … And on savers, whom Captain Phil can finally send to the grave. You just have to love the RBA “prayer” group.

      • HnH, mate, today it’s Cold War 2.0, tomorrow it’s FallOfTheBerlinWall 2.0. Maybe Trump doesn’t get re-elected, maybe it’s something else.

        Yesterday it was $30 iron ore, today a tailings dam in Brazil burst killing 200 people.

        Your analysis is great and insightful (that’s why I’m here), but I think that you have a tendency to assume that all actors will act rationally/predictably and to discount too heavily the possibility of a rainbow hitting Australia (read: the local elite establishment) in the arsе, again. If history shows anything, it’s that this can be counted on to happen with remarkable regularity. …this is a common thing that forecasters do… they forecast what SHOULD happen (and, by god, it should), but that is often not what will happen, once you factor in the likely non-rations and non-linear reactions of all actors… just ask Professor Keen.

        Similarly, as you’ve written off Australia as an economic basket case (which it is), you expect that everyone else will have reached the same conclusion and will stay away in droves.

        But the reality is that an eaten-out, reeling and rudderless, walking-in-slow-motion-like-it’s-just-been-hit Australia will for a long time remain a tempting dream for 80%+ of the worlds population, as it trades off its reputation inertia, its relatively low population density, in polluted landscape and the vestiges of Medicare, PBS, law and order.

        Edit to add: Stagmal has it exactly right here:

  1. US might QE print again and continue to lift rates, if they do i think they will introduce QE here too and raise rates not drop them. I think lowering rates in this environment would be a disaster for our economy it would tell the world that we are cooked. The economy is a confidence thing it is not built on solid foundations, dropping rates proves no confidence. My 2 cents…

  2. Ive been arguing this scenario to my clients for over a year… nice of UBS to show up.

    Problem is, either UBS is right on the economics or right on the rate cut but I just don’t see that they can be right on both. If the economy falters (which it clearly is already), the RBA won’t wait until November to move… they will go much earlier (May/June). If the RBA can afford to wait until November, then the probability is that I’m wrong on the data and the RBA won’t need to go at all. Either way, their argument of a lousy economy and November makes no sense. It’s a BS call…

    And of course, the Big 4 banks economists will only talk rate cuts once they’re fully priced.

    The key questions are: i) when – I think earlier than later, ii) how much. Given the banks will attempt to steal as much margin as they can – and with Haynes out of the way they’ll be shameless – we’re not talking 1-2 rate cuts if they go. If they get to the position of going, then we are looking at 3-4 rate cuts (or more).

    Cash rate 50bp anyone?

  3. our construction employment hit 10% of total employment and 13% of all full time – way more than US at the peak of bubble in 2006

    Just to give you an idea:
    – there are 1.2m people employed in construction jobs (almost all in residential) in Australia
    – there were 7.7m people employed in construction in USA in 2016 6.4 times more construction jobs while US population was 12 larger in 2006 than ours now (300m vs. 25m) ; US population growth was 3m vs ours 390k
    – our 10% construction jobs rate is higher than in Arizone (9.2%), Florida (8.7%), California (6.3%), only lower than Nevada (11.2%) at the peak in 2006.

    • Yep, people underestimate how huge it is and how leveraged the Construction workforce is into building shit apartments that no one wants.

  4. RBA to cut twice this year then twice more in 2020.

    how is that even possible when rate is 1.5%? none cuts by 0.25% when recession hits:
    3 Dec 2008 -1.00
    5 Nov 2008 -0.75
    8 Oct 2008 -1.00
    keep in mind that according to data available in Oct 2008 economy and inflation were booming

    there are going to be at most two cuts: 0.5% in June followed by 0.75% in August