Will RBA Downgrade its 2020 Growth Forecasts or Not?

The RBA notified in its November Statement on Monetary Policy that Australia is likely to observe a GDP growth of 2.75 per cent in 2020, gradually picking up to 3 per cent in 2021. The outlook was supported by:

• Recent tax cuts by the Morrison Government,
• Low Level of Interest Rates (0.75 per cent),
• Ongoing Spending on Infrastructure,
• Brighter Outlook for Resources Sector, and
• Upswing in House Prices.

However, economists anticipate that the recent GDP growth figures that have disappointed the RBA will lead to lower growth forecasts. The Australian economy saw a GDP growth of 1.7 per cent over the year to the 3^rd quarter of 2019 in seasonally adjusted terms, that was 0.1 per cent below the market expectations. The poor GDP growth was fueled by the weaker consumer spending that has failed to improve despite tax cuts and record low level of interest rates.

In addition to the weaker GDP growth, the ABS also announced disappointing data on some other indicators for October 2019 that are discussed below:

Dwelling Approvals Disappoint Again

In a recent update, the Australian Bureau of Statistics (ABS) has notified that the number of dwellings approved has slipped by 8.1 per cent in October in seasonally adjusted terms, driven by a fall of 11.3 per cent in private dwellings excluding houses. The market experts were expecting a fall of just 1 per cent in total dwellings approved. Moreover, the private sector houses declined 7 per cent during the month.

The weaker dwelling approvals data stood in contrast to housing prices that are moving upwards in Australia. The country has recorded its biggest rise in property values since 2003 of 1.7 per cent in November, announced a property consultant, CoreLogic in its latest report. The house price rise was fueled by increases in the two most established property markets of Australia ? Sydney (2.7 per cent) and Melbourne (2.2 per cent).

As per the RBA, the increase in property prices has not yet translated into robust sales for new housing, thereby leading to a contraction in the dwelling investment. The RBA expects an improvement in dwelling investment over the medium term.

Stagnation in Retail Turnover

Australia observed a stagnation in retail sales in October following a rise of 0.2 per cent in September, reported the ABS. This was against the analysts? expectations of a 0.3 per cent increase.

Victoria (-0.4 per cent), South Australia (-0.5 per cent) and New South Wales (-0.2 per cent) saw a fall, while the Northern Territory (2.3 per cent), Queensland (0.4 per cent), Western Australia (0.2 per cent), Tasmania (1.4 per cent) and the Australian Capital Territory (0.3 per cent) recorded a rise in seasonally adjusted terms.

Moreover, the fall in department stores (-0.8 per cent), clothing, footwear and personal accessory retailing (-0.8 per cent) and household goods (-0.2 per cent) was offset by rises in food retailing (0.1 per cent) and cafes, restaurants and takeaway food services (0.4 per cent).

Current Account Surplus Shrinks to $4.5 billion in October

Besides weaker dwelling approvals and retail turnover data, Australia saw a decline in its current account surplus by $2.3 billion to $4.5 billion in October, relative to September 2019. The exports of goods and services declined $2.2 billion to $40.7 billion, while imports of goods and services increased by $0.14 billion to $36.2 billion in seasonally adjusted terms.

Non-monetary gold drove the fall in exports, declining by 25 per cent or $0.66 billion during the month. Moreover, consumption goods fueled the rise in imports, increasing by 4 per cent or $334 million.

Unemployment Rate Rise to 5.3 per cent

Despite the RBA?s three interest rate cuts in 2019, the unemployment rate of Australia rose by 0.1 per cent to 5.3 per cent in October in seasonally adjusted terms. Moreover, the seasonally adjusted underemployment rate also increased by 0.2 per cent to 8.5 per cent.

Employment fell by 19k to 12.9 million people, with a decline of 10.3k and 8.7k people in full-time employment and part-time employment, respectively. However, over the year to October 2019, the full-time employment and the part-time employment have risen by 135.7k and 116.1k people, respectively.

The monthly hours worked in all jobs also dropped by 2.8 million hours to 1.78 billion hours. The employment to population ratio shrunk by 0.2 points to 62.5 per cent in October 2019 in seasonally adjusted terms and increased by 0.2 points from the same time last year.

In October 2019, Western Australia and Victoria observed the largest increases in employment of 6,300 people and 2,900 people, respectively, while Queensland, New South Wales and South Australia recorded the largest declines of 14,000 people, 10,300 people and 6,500 people, respectively.

The RBA expects the unemployment rate to remain around 5.25 per cent over the next few months, before eventually falling below 5 per cent in 2021. This anticipation is based on subdued growth in wages, which is likely to stay sluggish for some time.

The RBA believes that a lift in wage growth is needed to keep inflation sustainably within the target range of 2-3 per cent. Moreover, the central bank expects the inflation to remain close to 2 per cent in both 2020 and 2021.

Though recent data on different macroeconomic indicators is quite disappointing for the Australian economy, the central bank remains optimistic of favorable outcomes in future. Whether the RBA would lower the growth forecasts in response to these distressed indicators or not remains an interesting watch. Stay tuned to Kalkine media for more updates on the Australian economy!

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