Invest
RBA predicted to cut cash rate by late 2020
Leading economist Dr Shane Oliver of AMP Capital explains how a drop in house prices, tightening credit conditions and a marked slowdown in growth will force the RBA’s hand to make a rate cut.
RBA predicted to cut cash rate by late 2020
Leading economist Dr Shane Oliver of AMP Capital explains how a drop in house prices, tightening credit conditions and a marked slowdown in growth will force the RBA’s hand to make a rate cut.
GDP rose by just 0.3 per cent in the September quarter, and this saw annual growth slow to 2.8 per cent year on year. This was well below market (and RBA) expectations for growth around 3.4 per cent year on year.
To some degree, the slowdown in the September quarter reflects payback after two surprisingly strong quarters, but it also highlights the uncertainty around consumer spending as house prices slide and business investment remains patchy.
We still see the risk of a recession in Australia as being low, but the rising list of downside risks to growth also means that growth is likely to be constrained at around 2.5 to 3 per cent over the year ahead as opposed to achieving the RBA’s expectation for growth “to average around 3.5 per cent”.
There are a few main points investors should take into consideration from the September quarter GDP.
- Consumer spending slowed to just 0.3 per cent quarter on quarter or 2.5 per cent year on year.
Looking forward, apart from quarterly volatility, consumer spending is likely to remain under pressure. Yes, employment growth has been strong, but this is predicted to slow as wages growth is likely to remain weak (with average earnings up just 1.2 per cent year on year in the September quarter) and households unlikely to have the confidence to run down their savings further in the face of declining home values.
While the household saving rate was revised up, it’s still just 2.4 per cent, which is down from around 9 per cent in 2011 and more than a 10-year low. Likely, fresh tax cuts next year might help, but it’s doubtful they will be enough.
- Housing investment rose 1 per cent quarter on quarter and contributed 0.1 percentage points to growth.
While there is still a decent pipeline of work yet to be finished, housing investment will likely slow as the downtrend in building approvals flows through. This, in turn, will act as a drag on consumer spending via slower demand for household goods.
- Underlying business investment fell by 1.9 per cent quarter on quarter.
This takes into account asset transfers between the private and public sector. Investment detracted 0.2 percentage points from growth.
Mining investment is continuing to fall, but it’s getting near the bottom and the outlook for non-mining investment has improved.
- The infrastructure spending boom continues.
Underlying government spending – which takes into account asset transfers between the private and public sector – rose 1.5 per cent quarter on quarter and contributed 0.4 percentage points to growth. Public spending is likely to make a continuing solid contribution to growth over the next year.
- Inventories detracted 0.3 percentage points from growth.
- Net exports made a 0.3 percentage point contribution to growth.
The outlook for export growth is still positive, thanks to resource exports and as service exports like tourism and education continue to grow.
However, the contribution to growth is likely to slow going forward and is at risk if the US trade war with China is not resolved next year.
- Inflation pressures and wages are still subdued.
Inflation, as measured by the private final consumption deflator, was just 0.4 per cent quarter on quarter or 1.6 per cent year on year. Average compensation per employee was up by just 0.2 per cent quarter on quarter or 1.2 per cent year on year.
Real unit wages costs are falling at the rate of 1.5 per cent year on year.
What could this mean going forward?
The Australian economy continues to grow, but it’s slowed back to a subpar pace after a brief spurt.
A bottoming in mining investment, improving non-mining investment, strong infrastructure spending and strong export earnings should support growth going forward but are likely to be offset by the downturn in housing construction and house prices weighing on consumer spending.
As such, growth is likely to be stuck around 2.5 to 3 per cent over the year ahead.
Given the combination of falling house prices, tightening credit conditions and constrained growth, which will keep wages growth weak and inflation below target, we are changing our view on the RBA from anticipating rates to be on hold until the second half of 2020 to now seeing the next move being a rate cut.
However, with the RBA still seeing the next move as being up, it will take them a while to change their thinking, so we don’t see rates being cut until second half of next year.
When it does start cutting, the RBA will likely stick to 0.25 per cent increments and, since rate moves are a bit like cockroaches, there is likely to be more than one. This, in turn, will ultimately weigh on the Australian dollar.
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
Are you being priced out of the market? Have you got the Tuesday blues? And are you ready for the upcoming super changes?
Listen now
Are property prices set to crash? Should you jump on board the fintok craze? And how to prepare for this tax time
Listen now
Dissecting the budget and what it means for your equities, property and super
Listen now
Has the property market reached its peak; Biden’s climate summit and our sharemarket, and the upcoming budget
Listen now
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
