RBA Downgrades Consumption & Dwelling Investment Forecasts

RBA

In the quarterly Statement on Monetary Policy (SoMP) released by the Reserve Bank of Australia (RBA) today, the bank has downgraded the near-term consumption and dwelling investment levels for Australia considering the fall in property prices and weak household incomes.

As indicated in a recent hedonic home value index prepared by CoreLogic Inc., the housing prices have fallen across all capital cities of Australia except Canberra in April. In fact, it’s the most significant fall witnessed since the consequences of the global financial crisis. The property prices fell by 0.7 per cent and 0.6 per cent in Sydney and Melbourne respectively in the last month.

With falling property prices, the household income is more likely to affect consumption decisions. The RBA has lowered the consumption growth forecast from 2.75 per cent to 2 per cent over 2019. The reduction in anticipated consumption growth is due to weak household disposable income growth over the past few years and unfavourable housing market conditions.

The RBA had also downgraded the economic growth and inflation forecasts recently when it kept the official cash rate steady at 1.5 per cent for the 30th time. The economic growth target was reduced from 3 per cent in 2019 and 2020 to 2.75 per cent while the inflation forecast was lowered from 2 per cent to 1.75 per cent in 2019 and from 2.25 per cent to 2 per cent in 2020.

The bank also expects dwelling investment to decline substantially over the coming years as the fall in housing prices will have a direct effect on dwelling investment. Also, the reduction in building approvals for more than a year may contribute to a fall in dwelling investments in the coming years. The approvals to new dwellings got reduced by 15.5 per cent in March 2019 in seasonally adjusted terms, as per the latest figures announced by the Australian Bureau of Statistics. The bank anticipates a risk of fall in dwelling investment by more than the current forecast in the near term.

The unemployment rate is projected to remain unchanged at around 5 per cent for a while by the bank before falling to 4.75 per cent by mid-2021. As concluded by the RBA earlier, the current inflation rate indicates that the reduction in the unemployment rate is achievable while having inflation consistent with the target.

The RBA expects an increase in household disposable income growth over 2019 backed by employment growth, a gradual improvement in wages growth and growth in tax payments. The tax offset for low and middle-income taxpayers is set to come into effect in the second half of this year, as per the bank.

As the labour market conditions remained strong in the March quarter, the conditions suggest that the economic activity may have been better than that indicated by the GDP data. The bank sees several domestically sourced uncertainties for the growth and inflation outlook.

The Australian shares rose after the announcement of the monetary policy statement but fell slightly following the US’s imposition of tariffs on Chinese imports. The ASX closed the day’s trade at 6310.9 points, up by 0.25 per cent or 15.6 points (as on 10th May 2019) in comparison to the previous close.


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