Growth forecast trimmed

RBA report predicts slower economic recovery

THE Reserve Bank has confirmed a downgraded full-year economic growth forecast for 2019 and now thinks it will take longer before growth starts heading back toward its unchanged longer-term target.

A longer period of sub 2 per cent core inflation is also on the cards – as well as softer pick-up in wages than previously thought – with economists expecting the focus to turn to what form any additional stimulus will take, and how quickly it can be delivered.

The RBA trimmed its growth forecast for the 12 months to December by 0.25 percentage points to 2.25 per cent, and also downgraded its June 2020 forecast to 2.5 per cent from the 2.75 per cent it flagged in August. It’s the RBA’s fourth downgrade this year, and compares starkly with its outlook a year ago, when the central bank tipped annual growth of 3.25 per cent by December 2019.

Yesterday’s quarterly Statement on Monetary Policy said weak housing construction activity was the biggest nearterm risk with a larger-thanexpected contraction in dwelling investment delaying a gradual improvement in GDP growth. The bank lowered its December target from 2.3 per cent to 2.2 per cent and now sees wages tracking just 2.3 per cent higher on year average through the forecast horizon. Although the statement left the RBA’s June 2021 forecast unchanged at 3.0 per cent, the Australian dollar dipped from 69.02 US cents at the announcement to 68.82 US cents by 1pm AEDT.

“Further out, the outlook is more balanced,” the RBA said.

“A lagged response to rising housing prices and a period of low building activity means that dwelling investment would be stronger in the medium term than currently expected.” It said year-end growth of 2.75 per cent in 2020 would be supported by low interest rates and recent tax cuts, as well as infrastructure spending, the upswing in housing prices and a brighter outlook for the resources sector. However, the wage price index was lowered from 2.3 to 2.2.

CPI inflation for the year to December is also predicted to come in at a below – target 1.75 per cent – significantly lower than the 2.25 per cent the RBA said a year ago.

JP Morgan economist Sally Auld (pictured) said a return to 2.0 per cent core inflation – the lower end of the RBA’s target range – was now a story for 2021. “Taken at face value, (the change to wages forecast) implies that the bank will need to do more to deliver wages growth consistent with the inflation target,” Ms Auld said.