Investors might have noticed some recent positives from the Australian economy. GDP growth in the June quarter of 3.4% was above potential and the fastest rate since 2012, while business investment appeared to be healthier and investments in infrastructure and exports supported the growth.
We have seen some very good numbers on employment: the unemployment rate has tended to fall and is now at its lowest level in six years at 5.3%. Job offers, job offers and employment surveys have also been solid. While job vacancy growth slowed to 0.6% in the quarter ending August, vacancies increased by 16.5% for the year and remain high. This will probably prevent an increase in the unemployment rate.
Investors should, however, place these positive elements in context when assessing their impact on the Reserve Bank's next probable interest rate trend.
First, although a 5.3% unemployment rate is not bad, Australia still suffers from a very high level of underemployment. If you add underemployment (currently at 8.1%) to unemployment, the total underutilization of our labor market is around 13.4%.
This is not only historically high for Australia, but very high compared to the United States, which is around 7.4%. We still have a lot of slack on our job market.
The second point to note is that the RBA has another problem: uncertain consumer spending largely due to falling housing prices in Sydney and Melbourne. We believe more falls in Sydney and Melbourne are likely over the next two years due to tighter lending standards and increased supply. Falling real estate prices are weighing on consumer spending as people feel less wealthy.
The Possibility of a Rate Reduction
Given the slump in the job market and falling real estate prices, it's hard to see the RBA raising interest rates. We have been forecasting a rate hike for some time in 2020, but we certainly do not expect a rate hike in the last quarter of 2018.
Indeed, there is a slight risk that in 2019, the RBA will again have to reduce its interest rates. This is not our basic case, but we can not rule out the risk of a further rate cut if the housing sector's weakness affects the entire economy and threatens inflation downward.
Falling house prices will weigh on household wealth, limiting consumer spending at a time when the household savings rate is at its lowest level in 11 years and the growth of wages remains very low. This should help keep inflation under stress at the bottom of the target by 2 to 3% of the RBA.
Thus, taking into account all of this, growth should return to around 2.5 to 3%, which is lower than what the Reserve Bank predicts at a time when inflation is expected to remain low . Even though we believe that rates will remain unchanged for some time until 2020, we can not rule out another rate cut from the RBA if the fall in real estate prices intensifies at the same time. no further threat to inflation prospects.
Shane Oliver
is the chief economist of AMP Capital
and head of investment strategy,
in addition to being an adjunct professor
of Economics at Macquarie University
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