Australia: Growth to move above trend over the coming year - Westpac

The RBA has been front and centre this week, with the May meeting followed by a speech by Governor Lowe, then the release of the latest Statement on Monetary Policy (SoMP), points out Elliot Clarke, Research Analyst at Westpac.

Key Quotes

“Changes to the SoMP forecasts were subtle. Growth in 2018 and 2019 was held at 3.25%, while 2018 inflation was edged up to 2.00% (from 1.75%) following six months of 2% annualised core inflation. In contrast, the unemployment rate forecast for December 2018 was nudged up to 5.50% from 5.25%.”

“Broadly this implies that the RBA continue to expect growth to move above trend over the coming year and remain there. As a consequence, wages and inflation growth should accelerate – though on this point, Governor Lowe made clear in his speech that there has been very limited evidence of improvement to date. The edging higher of the unemployment rate forecast is simply a reflection of softer employment growth in February and March. They still believe the unemployment rate will move lower come 2019.”

“Westpac’s view remains more circumspect. We see growth holding a little below trend on average through 2018 and 2019 and, as a result, anticipate little progress on wages and inflation growth. Combined with the broad-based softening of the housing market, there is little to no justification for a rate hike in 2018 or 2019. In terms of the risks: to the upside the labour market will be key; to the downside the effect of macro-prudential regulation on credit growth and housing is crucial.”

‘Now as we end this week, for Australia, all eyes shift to next Tuesday’s Federal Budget. Often key initiatives are floated ahead of the event, but in this instance little information is available. We know that strength in commodity prices and employment growth have delivered a much-improved starting point for the Budget projections. For the most part, it seems that this windfall will be spent on personal tax cuts and the cancellation of the planned increase in the Medicare levy surcharge (previously announced to fund the NDIS). Additional spending on infrastructure; health; aged care; education and the environment is also expected.”