Growth to slow but econ­omy tipped to weather hits

The Weekend Australian - - BUSI­NESS -

2.7 per cent. But as­set price falls have added to the risks to so far re­silient con­sumer and busi­ness sen­ti­ment.

And de­spite some fis­cal and mon­e­tary pol­icy stim­u­lus in China and Fed­eral Re­serve com­men­tary in­di­cat­ing that the world’s most pow­er­ful cen­tral bank will pause its mon­e­tary tight­en­ing in re­sponse to weaker eco­nomic data, there is yet to be any ma­jor “re­set” of the macroe­co­nomic pol­icy levers that could pre­vent fur­ther as­set price de­clines.

Mean­while, a US-China trade war, the US gov­ern­ment shut­down and weaker off­shore growth could am­plify a US slow­down after mas­sive fis­cal stim­u­lus last year, and China’s pol­i­cy­mak­ers are walk­ing a fine line as they off­set their delever­ag­ing-in­duced slow­down with rate cuts and fis­cal eas­ing.

Aus­tralia faces ad­di­tional risks from the fed­eral elec­tion — due by May 18 — with La­bor plan­ning to limit neg­a­tive gear­ing to new hous­ing, wind back div­i­dend im­pu­ta­tion and re­duce the cap­i­tal gains dis­count from 50 per cent to 25 per cent amid a sig­nif­i­cant hous­ing down­turn.

But there are sev­eral pos­i­tive fac­tors sup­port­ing the out­look, ac­cord­ing to Citi. They are fo­cus­ing on the re­silience of the terms of trade (ex­port prices ver­sus im­port prices), the com­mis­sion­ing of LNG projects and stim­u­lus from the weaker dol­lar, favourable busi­ness and em­ploy­ment con­di­tions, strong in­fra­struc­ture spend­ing and low in­ter­est rates.

Wages growth has bot­tomed and a mild pick-up is now likely, the stronger bud­getary po­si­tion of the fed­eral gov­ern­ment is now giv­ing scope for more fis­cal spend­ing, and the re­cent re­moval of a 30 per cent cap on in­ter­est-only loans by reg­u­la­tors may see banks com­pete more ag­gres­sively for loans.

That is ex­pected to mod­er­ate the scale of in­ter­est-only loans that will have to be tran­si­tioned to prin­ci­pal-and-in­ter­est, eas­ing the squeeze on house­hold cash flows and spend­ing.

And while jobs growth has slowed, lead in­di­ca­tors such as hir­ing in­ten­tions and job va­can­cies are con­sis­tent with em­ploy­ment growth fast enough to ab­sorb new en­trants to the labour force.

“We there­fore do not see a ma­te­rial rise in un­em­ploy­ment needed to cause wide­spread forced sell­ing of prop­er­ties or spi­ralling non-per­form­ing loans,” said Citi chief econ­o­mist Paul Bren­nan.

Mr Bren­nan added that less high loan-to-value lend­ing in re­cent years helped limit these risks.

But he cau­tioned that while there was risk of a per­sis­tent down­side breach of the RBA’s in­fla­tion tar­get, fur­ther rate cuts could en­cour­age house­holds to in­crease fi­nan­cial lever­age at a time when of­fi­cials are al­ready con­cerned about the record high ra­tio of house­hold debt to dis­pos­able in­come.

Still, Mr Bren­nan said the con­tin­u­ing lack of in­fla­tion begged the ques­tion of whether it was ap­pro­pri­ate for the RBA to main­tain its guid­ance that the next move in rates was likely to be up. In his view, a change in this guid­ance could be used to ad­dress the tight­en­ing of lend­ing stan­dards, slow­ing in credit growth and cool­ing of the hous­ing mar­ket that have al­tered some of the risks to fi­nan­cial sta­bil­ity and raised con­cerns about the eco­nomic out­look.

“The RBA may worry that shift­ing to a neu­tral bias would in­vite mar­kets to so­lid­ify ex­pecta- tions the next move (in rates) is down,” he said.

“House­holds could as­so­ciate it with the ex­pec­ta­tion of lower eco­nomic ac­tiv­ity, which could serve to re­duce con­sump­tion and in­vest­ment ac­tiv­ity, but in our view it would be more of an ad­mis­sion that if the next move (in rates) is up, it is a long way off, prob­a­bly not un­til late 2020, as­sum­ing house prices and credit growth sta­bilise this year.”

In his view, mov­ing to a “neu­tral” out­look for rates would add down­ward pres­sure to the dol­lar, which could boost ex­ports.

Wages growth has bot­tomed and a mild pick-up is now likely

Newspapers in English

Newspapers from Australia

© PressReader. All rights reserved.