RBA tipped to cut outlook again on Q2 GDP

Alex Druce
(Australian Associated Press)

 

Economists expect the Reserve Bank to downgrade its growth outlook once again after witnessing the nation’s economy grind to its slowest pace of expansion since the GFC.

The 0.5 per cent increase for June quarter GDP was the same as the revised March quarter data and in line with market consensus, which was for year-on-year growth to soften to just 1.4 per cent.

ANZ senior economist Felicity Emmett said the result would be a disappointment for the RBA, which had forecast 1.7 per cent year-on-year for the quarter just a month ago.

“The slowdown in the economy has been remarkable,” Ms Emmett said.

“This time last year the economy was growing well above trend at 3.3 per cent, now annual growth has more than halved.”

NAB’s Kaixin Owyong said Wednesday’s would likely precede another round of growth downgrades in the RBA’s November Statement on Monetary Policy.

The central bank last month revised down its growth forecast for 2019, from 2.75 per cent to 2.5 per cent.

Westpac chief economist Bill Evans said the sluggish annual growth also strengthened the case for another interest rate cut in the “very near term”.

The Reserve Bank left the cash rate unchanged at a record low 1.0 per cent on Tuesday as it waits to see whether its twin 0.25 percentage point cuts in June and July had been enough to stimulate economic growth.

Expectations of another cut before the end of this year have been growing, however, after dismal construction, retail and import data.

BIS Oxford Economics economist Sarah Hunter said there were no big surprises in the June quarter GDP release, with net exports and government spending underpinning sluggish growth.

The main drag came from inventories and construction, while consumer spending remains in the doldrums, increasing by just 0.4 per cent for the quarter – albeit a slight uptick on the pace of growth over the prior quarter.

Investment in new and used dwellings also fell by 6.0 per cent in the quarter, with growth through the year down by 10.9 per cent – consistent with the weakness in dwelling approvals.

Dr Hunter said overall growth was likely to remain relatively subdued until the early 2020s, but that year-on-year expansion may have found a floor.

“The June quarter is likely to be the trough for the (year-on-year) growth rate … as the very weak quarters from late 2018 and early 2019 drop out of the calculation,” Dr Hunter said.

The Australian dollar rose from 67.63 US cents to as high as 67.84 shortly after the data was released.

Government final consumption expenditure contributed 0.5 percentage points to GDP growth during the quarter, while household final consumption expenditure contributed 0.2 percentage points.

Net exports contributed 0.6 percentage points to growth this quarter, reflecting strong exports of mining commodities.

Mining gross value added increased 3.4 per cent, while mining profits rose by 10.6 per cent driven by strong export growth and a continued rise in the terms of trade.

Mining investment rose 2.4 per cent, with increases in investment in machinery and equipment.

Dr Hunter said while there will be some support for households from recent cash rate cuts and federal government tax breaks, weak income growth will fundamentally constrain spending in the near term.

She also flagged that the residential construction downturn has further to run, while the positive contribution from net exports is also likely to fade, though remain positive, with the ramp up in LNG exports set to taper off.

CommSec senior economist Craig James, however, predicted annual growth to strengthen in the coming months as the anxiety caused by the May federal election dissipates.

“Businesses and consumers were reluctant to spend ahead of the election,” Mr James said.

“There are no guarantees that spending will lift in coming months if business and consumers remain anxious … and that may require even more stimulus to be applied by the government.”

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