RBA: Growth and inflation forecasts largely unchanged – Westpac

Matthew Hassan, Research Analyst at Westpac, notes that Reserve Bank of Australia has kept its growth and inflation forecasts largely unchanged as consumer and wage uncertainties dominate and it also suggested that it will take its time assessing what are expected to be gradual shifts.

Key Quotes

“The Reserve Bank has just released its February Statement on Monetary policy. As foreshadowed by the Governor’s decision statement earlier in the week and speech yesterday, key forecasts are unchanged from its November report.”

“GDP growth is forecast to rise from 2½% in 2017 to 3¼% in 2018 and 2019. Underlying inflation is forecast to rise only gradually, holding at 1¾% in 2018, then lifting to 2%, the bottom of the RBA’s target range, by 2019. These core views are as per November.”

“The only change to its reported forecasts is around the unemployment rate which is now expected to hold at 5¼% throughout 2018 and 2019 – previously the Bank had the unemployment rate holding at 5½% through to mid 2019, ticking down to 5¼% by December 2019. The shift reflects a lower starting point with the Bank still describing the outlook as a gradual decline, suggesting point estimates are being affected by rounding and that the expected moves are within the 0.25ppt range that triggers estimates to round one way or another.  In a similar vein, the Bank’s discussion of the inflation outlook notes a “marginal increase to reflect the expectation that spare capacity will decline a bit further than previously forecast” that presumably is also within the range of rounding and hence has not resulted in a change to published point forecasts.”

“As is usual practise in February and August, the Bank has extended its forecast horizon by another six months with forecasts now running out to June 2020. These have growth ticking down slightly to 3% and underlying inflation ticking up to 2¼%. The former reflects the roll off of export boosts relating to LNG production. The inflation figure confirms an expected return to the 2-3% target range that was implied by the Bank’s rhetoric in previous statements.”

“As always, there are a few interesting snippets in the detailed discussion. While the overall growth forecast is unchanged from November, weaker expectations for consumption are offset by stronger expectations around business investment and public demand.”

“As conveyed elsewhere, the consumer forecast represents a significant uncertainty, particularly around household incomes.  The statement notes that September quarter wage data was slightly weaker than expected, but may have been due to temporary factors that reversed in the December quarter. The Bank also notes rollovers to new enterprise wage agreements continue to exert downward pressure on wages growth and that the size of new wage claims will provide an indication of any recovery in wages growth. Wages growth continues to be a key uncertainty around the outlook for both demand and inflation.”

“The main themes in the rest of the document are as per the Governor’s decision statement and speech. The global backdrop has improved but the RBA’s expectations for the Australian economy are broadly unchanged with uncertainty centring on the consumer, household incomes and factors affecting labour markets and wages growth. The emphasis is again on the gradual nature of the expected lifts in growth and inflation. The slow pace of shifts, particularly around wages which can often be slow to reflect changes in labour market conditions anyway, the reliance on quarterly data releases such as wages growth, CPI inflation and the national accounts, and the uncertain nature of key parts of the forecast view suggests the RBA is preparing to take its time in assessing how conditions are tracking.”

“Westpac continues to see a more challenging year ahead for the Australian consumer and another sub-par year for wider economic growth. While there will be some improvement in incomes and wages growth we expect it to be only slight. More importantly, we also expect consumer spending to again disappoint, falling well short of the RBA’s anticipated return to 3% growth. Accordingly, we see official rates staying on hold throughout both 2018 and 2019.”