RBA: outlook positive

We’re set for strong end to year as LNG exports kick in

THE drawn-out recovery from last year’s shock contraction means the Australian economy will splutter through the first half of 2017 before hitting its straps by year’s end, new forecasts from the Reserve Bank have revealed.

And another interest rate cut appears off the radar, with a largely upbeat RBA prepared to wait two years for underlying inflation to return to its 2-3 per cent target band.

The central bank’s latest quarterly economic update came as the International Monetary Fund urged Australia’s banks to fortify themselves against the risks around rising house prices.

The RBA said the dip in gross domestic product growth in the three months to September, which caught many observers by surprise, warranted a windback in its near-term growth forecasts, while reiterating the weakness appeared temporary.

GDP growth is now expected to average 1.5-2.5 per cent to June – a full percentage point lower than November’s forecast – before picking up to 2.5-3.5 per cent by December.

While surging commodity prices have dramatically lifted the fortunes of mining giants including Rio Tinto – which this week reported a more than $6 billion turnaround in fullyear net profit – they are not expected to boost mining investment levels or jobs, the RBA said in yesterday’s statement of monetary policy.

Instead, a ramp-up of lique- fied natural gas exports was projected to tack on about half a percentage point of growth this year and next, the RBA said, while property demand was also set to remain high.

“However, if investors were to reassess expected returns to property investment, some projects currently in the pipeline could be at risk of not going ahead,” the RBA said.

It also warned consumers now appeared more inclined to save rather than spend amid a period of muted wage growth.

However, in further evidence of the RBA’s rising comfort on price pressures, underlying inflation is projected to re-enter the target band by June 2019.

Previously unpublished forecasts on unemployment had it plateauing over the next six months before hovering between 5 and 6 per cent throughout the next few years.

The RBA’s forecasts are also based on the Australian dollar maintaining its present levels at around US76¢.

RBA governor Philip Lowe said in a speech on Thursday the economy was about 90 per cent through a slide in mining investment, leaving the economy in “reasonable shape”.

Capital Economics’ Paul Dales labelled the RBA’s call of 3 per cent GDP growth by year’s end about 1 per cent too high.

But ANZ’s David Plank said the RBA appeared “more confident” inflation would recover as “some of the factors that have been holding down inflation, like the falling terms of trade and the decline in mining employment, are dissipating”.