Finance Finance News Australia’s economy: The doctor’s diagnosis is here

Australia’s economy: The doctor’s diagnosis is here

Australian economy update
Colin Brinsden gives his diagnosis on the health of the nation's economy. Photo: TND
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Australia’s economy is due for its monthly health check up, and there are some issues that need medicating – slower economic growth, falling house prices, tame inflation and an uncertain global economy.

The Reserve Bank will have to remedy these factors when it sits down for its first board meeting of 2019 next week.

A lot has happened since the central bank board last sat in early December. So much so that financial markets are now factoring in the risk of an interest rate cut when previously the general view was the next move was up.

But the diagnoses are not all bad, with employment continuing to grow at a heathy pace and the rate of unemployment set to fall below 5 per cent.

“As long as the unemployment rate is not rising … I think rate cuts are off the table,” HSBC chief economist for Australia and New Zealand Paul Bloxham told Sky News.

The New Daily gave Australia’s economy a once-over, and this is what we found.

Economic growth – weaker than RBA had forecast

The September quarter national accounts released the day after the last board meeting showed annual growth rate unexpectedly slowed to 2.8 per cent when central bank governor Philip Lowe had predicted the economy expanding by 3.5 per cent in 2018 and 2019. The slowdown reflected a sharp drop in household spending growth.

Global growth – risks point to the downside

Last week the International Monetary Fund downgraded its world growth forecasts again and issued a stark warning that an escalating trade war between the US and China and a “no deal” Brexit were a threat to the economic outlook. Annual economic growth in China, Australia’s No.1 trading partner, has also slowed to a 28-year low of 6.6 per cent.

Inflation – remains below RBA’s 2-3 per cent target

The annual rate of inflation ended 2018 at its lowest level in more than a year, and at 1.8 per cent remained below the Reserve Bank’s 2 to 3 per cent target band. A drop in petrol prices was one factor behind the benign outcome in the December quarter, and prices at the bowser have since fallen further.

House prices – suffered their largest monthly drop since the GFC

The value of housing continues to slide, posting the largest month-on-month nationwide fall since the 2008-2009 global financial crisis in December. The largest declines continue to focus on Sydney and Melbourne. Borrowers are facing tighter lending conditions, but the proportion of first-home buyers taking out a mortgage is at its highest in six years as they take advantage of cheaper prices.

Consumer confidence – off to a wobbly start

The mood of Australians got off to a wobbly start to the year in the face of falling house prices and an uncertain global economy. Consumer confidence, a pointer to future retail spending, still remains above its long-run average aided by strong employment growth.

Business conditions – suffered largest monthly slump since the GFC

Conditions suffered their largest monthly slump since the GFC in December, continuing the downtrend in the second half of 2018. The deterioration in conditions in the month was relatively broad-based across states and industries, but was particularly weak in retailing. Business confidence remains below its long-run average.

Employment – jobs growth remains strong

Employment remains strong, which has pushed the unemployment rate down and is on the cusp of breaching 5 per cent for the first time in some eight years. About 1.2 million jobs have been created under the watch of the Coalition government since it came to power in 2013. Prime Minister Scott Morrison has made an election pledge that a further 1.25 million jobs will be added to the economy in the next five years.

Wage growth – remains sluggish

Strong employment is still expected to lift wage growth, albeit slowly. Some businesses are reporting skill shortages, another factor that could lift wages.

Federal budget – on track for a surplus in 2019-20

The mid-year budget review released in mid-December showed the government remains on track to produce a surplus in the 2019-20 financial year. A surge in company tax receipts has put the budget on a firm footing and has allowed the government to set a aside almost $10 billion in possible tax cuts before the May federal election. The release of the annual budget has been brought forward to April 2 because of the election.

Financial markets – 70 per cent chance of a rate cut

The has been an about-face in thinking on the interest rate outlook and money markets now see a 70 per cent chance of a rate cut this year. Previously, the market was more in line with the Reserve Bank’s stance that the next move in rates would be up, albeit some way off.

The final report

Most economists agree with the central bank, although there is a growing band who believe a cut will be necessary to offset the impact of declining house prices, slowing economic growth and some retail banks independently raising their lending rates as their borrowing costs increase in the global market.

The Reserve Bank’s cash rate has been at a record low of 1.5 per cent since August 2016.

Colin Brinsden is AAP’s former economics correspondent based in the Canberra Press Gallery

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