Another weak report for economic growth in Australia, but still not enough progress on inflation to allow the RBA to cut interest rates just yet. Our latest thoughts and forecasts in the first week of Spring.
Markets remain on edge building up to the US Federal Reserve’s first rate cut expected on September the 18th and with mixed indicators about the health of the US economy, but lower bond yields and more rate cuts are evident.
The Bank of England and the Reserve Bank of New Zealand initiated their easing cycles last month, and a range of central banks will keep cutting rates over the next few months, but Australia remains at the back of the queue.
Our headline CPI rate should keep falling steadily through the financial year thanks to the electricity rebates and base effects, with the monthly indicator down to 3 ½% in July, but underlying inflation will be slower and more stubborn in its path back to target.
As a result, despite another weak read for GDP in Q2, with our economy only growing 0.2% for the quarter or 1.0% through the year, the RBA will need more evidence that core inflation is under control before it can join other central banks lowering official rates. The GDP data was as forecast and was our 11th consecutive quarter of growth, but 1% is the slowest growth rate (outside the pandemic) since the ’91 recession, and we remain in a per capita recession.
Population growth and government spending kept the economy growing, but household spending fell 0.2% with discretionary spending particularly weak, so where’s the good news? Fortunately, this is likely to mark the low ebb for household consumption and disposable income, which is forecast to pick up steadily this quarter thanks to the stage 3 tax cuts and electricity rebates, and as inflation becomes less of a drag on incomes. As for when lower interest rates also add to household income, we continue to forecast rate cuts in
2025, with February or May the most likely months for relief, depending on quarterly inflation data, but there are two other variables to keep an eye on.
One is the jobs market, which remains relatively strong despite the recent uptick in unemployment to 4.2%, but a sudden loosening in what have been tight labour markets would impact the Reserve Bank’s timelines for rate cuts.
Secondly, any market dislocation on financial markets could influence the RBA, but for now we are simply seeing spikes in volatility on equity markets, and to some extent in bond and FX markets, rather than any need for central bank intervention, and recent falls in stock markets have been from record highs. Nevertheless, the transition from tightening cycles to easing cycles (and the impact of tight monetary policy) remains challenging and uneven.
Meanwhile, residential property prices continue to trend higher especially in regions where supply of new dwellings is constrained, but this financial year should see much more moderate increases in property values, broadly matching inflation.
In short, economic growth and household incomes are forecast to gradually recover from here, but rate cuts in Australia still look more likely to occur next year, ultimately taking us back to a more neutral setting about 1% below where we are today.
And that’s the market update from Bendigo Bank.
