Australia: Economy remains in a mix – Westpac

Australia Q1 GDP was weak, with weather disruptions playing a part which is likely to pass and recent strengthening in employment growth will provide some support ahead, explains the analysis team at Westpac.

They further add that weakness in wages growth and lacklustre consumer confidence will continue to cast a cloud, suggesting that the economy remains in a mix of macro factors.

Key Quotes

“Business sentiment remains strong, although actual investment is muted, while a sizeable pipeline of public works will support growth.”

“Macroprudential and regulatory changes are exerting de facto tightening and also impacting sentiment. Lending rates continue to increase for certain borrowers and combined with weak sentiment, housing markets are expected to slow. The SA government announcing an (additional) bank levy as part of their state budget is yet another twist in this debate, and in our view continues the de facto tightening currently impacting sentiment.”

“Regulatory focus on housing and potential financial stability risk remains. This has seen (expected) ratings downgrade of the banks, with agencies pointing to economic imbalances driven by house price appreciation, high levels of household debt and low wage growth.”

“This mix means RBA moves remain a distant proposition.”

“For the currency, this should see a weaker AUD through 2H17 and into 2018 – underpinned by: RBA firmly on hold; the Fed will raise rates again this year and will commence balance sheet normalisation; commodity prices converge back to cost curves in 2018 and China to soften further in 2018.”

“Given this respective monetary policy outlook, a key question for bond markets is whether the AU-US 10 yr spread can move inverse. We believe it can, but probably not in the near term.”