Another day, another sobering piece of economic news.
On Wednesday it was GDP growth figures that showed the economy is going nowhere, and appeared to confirm at least one, possibly two – some say even three – more rate cuts.
The release of the national accounts figures showed that Australia’s GDP growth rose by just 0.4 per cent in the March quarter. That equates to an annual rate of 1.8 per cent, the lowest annual rate of GDP growth since 2009.
That was also below the market’s quarterly forecast of 0.5 per cent, and well below the Reserve Bank’s annual growth forecasts of 2.75 per cent.
It also comes after figures showed the economy grew in the September and December quarters by just 0.3 and 0.2 per cent, equating to an annual rate of just 1 per cent.
Unless economic growth has picked up significantly since March, and the latest figures are lagging the reality, they appear to bolster the case for more rates cuts.
AMP Capital chief economist Shane Oliver said the GDP data would justify the RBA cutting interest rates “multiple times to get growth up and get the unemployment rate down below 4.5 per cent (currently 5.2 per cent)”.
In line with the RBA indications and most other economists, Mr Oliver predicted an August cut, but believes the central bank won’t stop there.
“We see another 0.25 per cent rate cut in July or August and two more rate cuts in the first half of 2020 which will take the cash rate to 0.5 per cent in 2020,” Mr Oliver said. “Hopefully additional fiscal stimulus will help too.”
Investment bank JP Morgan has predicted the RBA will cut another three times by the middle of 2020 taking the cash rate to 0.5 per cent, while Westpac economist Bill Evans has forecast another two cuts by the end of this year ending in a cash rate of 0.75 per cent.
NAB forecasts one more cut in 2019, and “the risk” of another in early 2020.
CBA senior economist Kristina Clifton said the GDP figures showed that spending fell in the areas most sensitive to ‘wealth effects’, including recreation, eating out and clothing.
But despite the dismal data, Ms Clifton told The New Daily she doesn’t believe the RBA will go for more than one cut in 2019.
“I don’t think a weak Q1 GDP outcome would have been a surprise to the RBA at all,” Ms Clifton said.
“They have said many times that developments in the labour market will determine whether they need to cut the cash rate further. So it’s the labour market reports which have particular importance at the moment.
“We think they will cut again in August but have them on hold after that because there are also tax cuts coming and changes from APRA which should support the housing market.”
KPMG chief economist Dr Brendan Rynne said the GDP confirmed “the RBA may have missed an opportunity to cut rates more aggressively” and use “limited monetary firepower in a big bang”.
Dr Rynne said a 25-point cut now and one later this year was “neither here nor there”, but he didn’t advocate for a further cut this year, believing the RBA was committed to a wait-and-see approach.
But what is needed urgently was government fiscal stimulus in the form of targeted infrastructure projects being expedited, as well as the passing of proposed tax breaks, “as monetary policy won’t do all the heavy lifting”.
Finance commentator Pete Wargent was more sanguine, saying the dismal housing market of the past 18 months had greatly subdued economic growth in 2018.
“The economy in 2018 was largely reflecting APRA’s squeeze on credit and the banking royal commission, so the economy essentially stalled,” Mr Wargent said.
“The turnover [of property] was some of the lowest we’ve ever seen, which greatly affected spending, especially household-related spending.”
But Mr Wargent added that the federal election result, as well as APRA’s proposal to relax loan serviceability requirements and a drop in interest rates, may be the catalysts to get the economy moving again.