Declining household consumption and rising unemployment are among the downside headwinds that could force the Reserve Bank (RBA) to change course and lower its economic growth forecasts, a leading analyst said on Thursday.
Westpac chief economist Bill Evans believes growing pressure on the economy could force the RBA to intervene on two occasions this year, with a possible interest rate cut in August followed by another in November, which would reduce the official cash rate to an unprecedented low.
While data released this week points to a gloomier than previously expected outlook for Australia’s economy, RBA governor Dr Philip Lowe continues to stand pat on the official 3% growth target, even though achieving that figure appears increasingly unlikely. Mr Evans said it will be “very hard” to hit 3% this year.
He added: “I would expect that they’ll drop their forecast and that when they sit down in May [to update forecasts] they’ll shave that 3% to 2.75%. The Aussie dollar’s been pretty stable, monetary policy’s on hold, the global economy’s slowing down and we’ve seen the turning point in the residential construction cycle.”
Mr Evans believes those developments will be a drag on growth for the foreseeable future and warned that homeowners will tighten purse strings further as their relative wealth diminishes due to low wage growth, which will have a knock-on impact of lowering consumption. He said this “income recession” is now becoming more prevalent.
Westpac is not the only banking corporation to have tipped further interest rate cuts as UBS recently said that it could envisage the RBA opting for 25 basis point moves in successive months in July and August. However, UBS banking analyst, Jon Mott does not expect borrowers to feel the full effect of the cuts immediately.
In a note written this week, he added: ‘We believe it is more likely the major banks pass through around 30 basis points of the RBA’s potential 50 basis points in rate cuts to mortgagors. However, this would still leave bank earnings under pressure.’
Official data released this week showed Australia’s economy contracted on a per capita basis during the quarter to December and Mr Mott said that the RBA may be powerless to act if there is a sharper slowdown as reducing the cash rate below an already record low of 1% would not make any discernible impact.
Mott said RBA governor Lowe had shared a similar sentiment during a speech as deputy governor seven years ago, where he claimed that anything below that threshold would only provide a small incremental benefit and that other unconventional monetary policy would probably be more effective.
The RBA’s current deputy governor, Guy Debelle noted last year that qualitative easing and other forms of unconventional policy could be used to support the economy, but stated that such measures were unlikely to be introduced by the bank any time soon.
Australia’s economy does appear to be entering a period of slowdown after nearly three decades without a recession. However, Federal Treasurer Josh Frydenberg continues to be optimistic and recently claimed that its strong economic management had been praised by the International Monetary Fund (IMF).
Westpac’s Evans believes interest rate cuts will be inevitable if growth falls and the jobless rate rises off due to the growing tide of pressure that turn of events would cause. Despite the concerns, he said that it was too early to say that there is a recession and is reluctant to predict if or when it could actually happen.
He concluded: “We’re certainly not in a camp that’s calling a recession, but we are calling growth below potential which is likely to mean a higher unemployment rate.’