RBA optimism on growth not widely shared

Stuart Condie
(Australian Associated Press)

 

Some economists are sceptical of the Reserve Bank’s increasingly rosy outlook for the Australian economy, with wage growth and the housing market threatening the central bank’s updated forecasts.

The RBA, which on Tuesday kept the official cash rate at a record low of 1.5 per cent, has signalled that it expects growth to be stronger and unemployment to be lower than its previous projections.

The RBA now expects GDP to grow by 3.5 per cent in 2018 and 2019 – compared to its previous forecast of 3.0 per cent in both years – before moderating in 2020.

The 2020 unemployment forecast was tweaked from 5.0 per cent to 4.75 per cent, .

Governor Philip Lowe did acknowledge weakening Sydney and Melbourne property prices – as well as concerns over household consumption – but not enough for some economists’ liking.

Sarah Hunter, chief Australia economist for BIS Oxford Economics, said the economy is only likely to expand by about 3.3 per cent this year and could slow to below 3.0 per cent in 2019.

“We are not as optimistic on the outlook for the economy,” Ms Hunter said.

“Like the RBA, we see consumer spending as the biggest drag on growth momentum next year: consumers can’t sustain faster growth in spending relative to incomes indefinitely, and with income growth still weak we expect momentum in consumer spending to slow as we head into 2019.”

Marcel Thieliant, an economist with Capital Economics, agreed the RBA was being overoptimistic and said the cash rate – which has not moved since August 2016 – will remain on hold throughout 2019.

“We still think that the economy won’t live up to the RBA’s expectations and retain our forecast that the bank won’t hike interest rates until late in 2020,” he said.

“We still think that the RBA is underestimating the impact of the housing downturn on consumer spending.”

The RBA last cut the rate in August 2016 and has repeatedly signalled things are not likely to change for some time.

In his statement on monetary policy, Dr Lowe said the RBA saw inflation at 2.25 per cent in 2019 and “a bit” higher the following year.

“The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process,” Dr Lowe said.

CommSec chief economist Craig James said that, with inflation still below the mid-point of the RBA’s 2-3 per cent target band until 2020, the central bank “hasn’t changed its policy stance one iota”.

The Australian dollar ticked up from 72.05 US cents just before the RBA decision, to 72.14 shortly after.

At 1535 AEDT, it was buying 72.13 US cents.

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