Finance Finance News Reserve Bank tips economy is about to take off as households crank up spending

Reserve Bank tips economy is about to take off as households crank up spending

The booming economic figures should give Scott Morrison reason for cheer. Photo: AAP
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In a pre-budget confidence boost for the federal government, the Reserve Bank is forecasting the Australian economy to soar in the December half and keep flying throughout the new financial year.

Friday’s quarterly statement on monetary policy (SOMP) maintains the optimistic outlook of the February SOMP. After expected GDP growth of 2.75 per cent this financial year, the RBA’s best guess is that growth will jump in the December six months to deliver 3.25 per cent growth in the calendar year.

That will grow to 3.5 per cent for the new financial year, before coming down a little to 3 per cent for the 2019-20 financial year.

The Treasury’s preferred year-average measure is forecast to be 3.25 per cent for the next two financial years.

Given that Australia’s ‘trend’ growth is now scored at 2.75 per cent, the predicted 3.25 and 3.5 per cent is heady stuff indeed. They are the sort of booming figures that will allow Treasurer Scott Morrison to claim the economy can afford the tax cuts the government needs for the next election.

reserve bank statement on monetary policy

What’s somewhat surprising about the RBA’s latest forecast is where it thinks much of the growth is coming from: household consumption. That’s the consumption of households where real wages growth remains flat and spending continues to outpace income.

The RBA is betting on significantly stronger household consumption when the national accounts for the March quarter come out on June 6.

“The starting point for domestic final demand growth is somewhat stronger than previously expected because there appears to have been more momentum in household consumption than suggested by initial estimates,” the RBA said on Friday.

“Growth in the economy is expected to be around trend in the near term and to increase to be above 3 per cent for the remainder of the forecast period.

“Consistent with this, employment is expected to grow a little faster than the working-age population and the unemployment rate is expected to decline gradually, to 5.25 per cent.

“In this environment of diminishing spare capacity, wage pressures are expected to build, and underlying inflation is expected to increase gradually from close to 2 per cent currently, to be above 2 per cent by the end of the forecast period.”

With the bank forecasting inflation to only creep into its target band in two years’ time, the prospect of any official interest rate rise looks weak before at least late 2019.

Not for the first time, the RBA cautions there continues to be “considerable uncertainty about how much spare capacity there is in the economy, how quickly it might decline and how this might translate into wage and inflation pressures”.

“Upward revisions to household consumption in previous quarters and stronger-than-expected non-mining business investment meant that domestic demand growth over 2017 was stronger than previously thought. Recent indicators point to consumption and non-mining business investment growth maintaining this momentum and exports recovering in the March quarter.”

It’s the improvement in the exports/imports equation that has had many private sector economists turning optimistic about the March quarter figures.

Meanwhile, back in the real world, there is no shortage of retailers and consumers who might be surprised to be told that consumption is strong, growing and set to soar over the year ahead. Or so we all hope.

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