The Reserve Bank of Australia pulled off an expert con-job last week. Reading the general press and market commentary that followed the release of the RBA’s latest Statement on Monetary Policy, one could be forgiven for thinking that the economic outlook had improved – so much so that the RBA has explicitly dropped its so-called “easing bias”.
It noted signs that the weaker Australian dollar was boosting tourism exports a little, while survey measures of business conditions in the non-mining sector had lifted to above-average levels. Employment growth has also picked up.
Capping off the good news, the unemployment rate was now no longer expected to rise over the coming year, but was rather “expected to remain little changed from recent levels for some time.”
But before we start popping the champagne corks, dig a little deeper and it’s clear all is not so rosy. In fact, the RBA’s forecast for economic growth in the year to end-June still remained a measly 2%. And over the year to end-June 2016, the RBA actually lowered the mid-point of its economic growth forecast range from 3% to a modest 2.5%.
Recall moreover, that back in February the RBA was forecasting growth of 2.25% in the year to end-June 2015, and solid 3.25% growth in the year to end-June 2016. The RBA has been progressively downgrading its economic growth outlook through this year even as it diligently left interest rates on hold.
Of course, one of the reasons it has lowered this growth outlook is that is shaved back its expected growth in the working-age population from 1.75% to 1.5% - due to reduced rates of immigration as the local labour market is not as attractive to would-be foreign job seekers as it once was.
But that’s only part of the story. Reduced population growth is also expected to have negative knock-on effects on consumer spending and non-mining business investment. Weaker overall growth – even if partly due to weaker population growth – still undermines the sales and profit outlook for corporate Australia, making them even more reticent to invest.
What’s more, further discretionary tightening in the May Federal Budget – as clearly indicated in the RBA statement, also contributed to downward revisions to expected growth in public demand.
The saving grace, of course, is that unemployment may well stabilise as there’ll be less growth in foreign workers looking for jobs. But with the unemployment rate currently at 6.3% - and the RBA previously forecasting a rise to 6.5% by June 2016 – that’s not much consolidation. Even the RBA conceded the unemployment rate will remain “elevated”.
And, much as I hate to say it, I still see a lot more downside than upside risks for the economy.
For starters, given the tightening in lending conditions and the demonisation of property investors, I fear the home building boom will not remains as strong as the RBA still confidently imagines. Ominously, auction clearance rates in the hot Sydney property market have cooled in recent weeks.
And even if employment growth is picking up, the replacement of high-wage mining jobs with low-wage tourism jobs is continuing to crunch household income growth and leave consumer sentiment subdued. Weak income growth – which largely explains the drop in the saving rate also - risks undermining official hopes for a strong rebound in consumer spending.
There’s also a risk that the recent lift in employment may not last. As seen in the chart below, the National Australia Bank survey measure of employment intentions – which tends to lead job vacancy data by three to six months - has turned down in recent times. If this lasts, it would not bode well for job vacancies and employment.
With weaker population growth and intensification of the downturn in commodity prices and mining investment, even 2.5% growth in the coming year – which still represents a step up from 2% growth over the past year – is by no mean an easy target. If the home building approvals level out and the employment indicators do turn down again, another year of weak growth and rising unemployment could easily be ahead of us. The one potential counter-weight would be an even sharper decline in the $A, providing a much needed shot in the arm to tourism and education.
All up, despite the RBA’s recent upbeat statements, the bias on interest rates and the $A over the coming year still remains firmly to the downside.
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