Growth to slow but economy tipped to weather hits
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