RBA Maintains Positive Outlooks, but Open to More Rate Cuts

The Reserve Bank’s quarterly report, released today, delivered a positive outlook for the Australian economy. The RBA cited falling unemployment, low inflation, and a weaker dollar as evidence the post mining transition was still on track.

In its statement, the RBA noted:

Non-mining business investment is forecast to pick up in the second half of the forecast period, reflecting the improvement in domestic demand. There has been a noticeable improvement in labour market conditions that was not anticipated at the time of the previous statement.

Also the low growth of wages is likely to have encouraged businesses to employ more people than otherwise.

That reference to a noticeable improvement in the labour market was a half percent drop in unemployment. The past year has seen the jobless rate fall from 6.3% to 5.8%. It’s confounded even the most optimistic of observers.

The strong figures could be down to slowing migration that’s affecting the working age population. It could have to do with record low wage growth. Or it could be something else altogether. In truth, it’s probably down to a mixture of many different factors. Whatever the case, the jobs market continues to defy expectations.

Despite this positivity, the RBA forecasts few changes for growth in the years ahead. It expects GDP to remain mostly on par with 2015. Over the next two years, projected growth is slightly above the decade long average. That’d leave it somewhere between 2.5—3%.

As for the rest of 2016, the RBA’s forecasting growth to hit anywhere between 2.5% and 3.5%. That’s actually up from the bank’s slightly more bearish forecast in November.

Of course, one whole percentage point of leeway leaves a lot of room for error. In any case, the RBA isn’t forecasting a downturn anytime soon. It’s not surprising that they’d say that, of course, but good to know either way.

RBA has China on its radar

China heads the list of culprits that still pose a serious threat to the Australian economy, according to the RBA. The bank stated:

The outlook for China continues to be a key source of uncertainty for the forecasts. The recent bout of global financial market volatility has been characterised in part by concerns about the evolving balance of risks in China and the ability of Chinese authorities to manage a challenging economic transition.

Any sharp slowing in economic activity and increase in the financial stresses in China could spill over to other economies in the region.’

Again, there’s nothing particularly revelatory in that.

We know that China’s wellbeing would send commodity prices tumbling even further. We know that’d crimp on Australia’s national income. And we know all this because it’s been the same story for the past seven months. It’d be nice if they could give us some more insight once in a while. But maybe that’s too much to hope for.

What conclusions can we draw? If nothing else, it’s that the RBA’s growth projections are, for lack of a better word, pointless.

If your basis for future economic growth rests on China, it’s lacking some serious foundation. China has proven how volatile and unpredictable it can be. We’ve seen firsthand the kind of panic any blip sends throughout global markets.

Yet the RBA probably has one thing right. Should commodity prices — oil in particular — fall further, it may work in Australia’s favour. Cheap oil prices have the effect of boosting consumer spending. It frees up household budgets to spend elsewhere. But they go even further for economies such as China’s. And they benefit its major trading partners too, Australia included.

RBA to maintain easing bias

Finally, the RBA indicated it will maintain an easing bias going forward. In other words, they’re open to more rate cuts should they be necessary. As the RBA noted, ‘continued low inflation may provide scope for easier policy should that be appropriate to lend support to demand.’

It seems a safe bet that we’ll see at least one more rate cut this year. Possibly even two. Obviously, much of that will depend on what happens to rate policies elsewhere. But with negative interest rates all the rage at the moment, our record low 2% cash rate is looking rather lofty. Expect the RBA to set a new record with its rate policy soon.

Mat Spasic,

Junior Analyst, Markets and Money

PS: Central bankers’ monetary manipulations are nothing new. Banning cash is the final frontier for them to maintain low interest rates as long as they want. Markets and Money’s Phillip J. Anderson reckons interest rates will remain at current record lows for years.

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Inflation, stemming from low rates, will eat into your savings. Worse still, you won’t be able to count on savings funding your retirement. The regular return on term deposits has halved in the last four years alone.

But you have options…if you choose to act now.

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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