Australia: Weak consumer at the epicentre, could fiscal policy surprise? - Westpac

The Australian economy stepped up a gear in 2017, following a disappointing 2016, against the backdrop of a stronger global economy, but growth has been uneven and the retail and consumer sectors remain weak, according to David Goodman, Research Analyst at Westpac.

Key Quotes

“It appears sluggish wages growth is key to consumer caution. 11 of the last 13 monthly reads of consumer confidence have been negative. Australian households will remain squeezed by low wages growth, high energy costs and high debt levels.”

“The constrained consumer and the associated uncertainty for business will make it very difficult for the RBA to achieve its 3.25% growth forecast for 2018. We expect growth to slow in 2018, led by a fall in home building activity, as well as a loss of momentum in China. The benign inflation backdrop means that RBA policy moves are thus a distant proposition and Westpac Economics expects RBA on hold for 2018 and 2019.”

“This forecast sees the RBA cash rate below the Fed funds rate for the first time since 2000, which will be a critical issue for bond and currency markets. Front end spreads (out to 2 years) have already inverted; the question will be whether long end curves can too. We suspect so, meaning and yield spreads are likely to weigh heavily on the AUD over the course of 2018.”

“Game Changer: Could 2018 see the rise of Australian fiscal policy? Globally we have seen moves towards more active fiscal policy (US, UK, Canada and NZ) so could Australia be next? With monetary policy ammunition running low, could this be the catalyst for a changed economic outlook? With a 2019 election due, there have been some early suggestions of personal income tax cuts, although the political backdrop remains challenging.”