RBA and government likely to lower their growth forecasts in wake of GDP report – Westpac

In light of the latest third quarter (Q3) Gross Domestic Product (GDP) numbers from Australia, Bill Evans from Westpac anticipate that the Reserve Bank of Australia (RBA) and the Australian government will lower their future growth forecasts. However, the analyst still supports the Westpac estimation of 2.4% GDP figure for the year 2020 following a 2.3% increase in 2019.

Key quotes

The Australian economy grew by a disappointing 0.4% in the September quarter for an annual growth of 1.7%.

Of most concern is that this represents the fifth consecutive quarter where private final demand, which declined by 0.3% in September, either contracted or was flat.

The contraction in the dwelling construction cycle continued into the September quarter.

The Federal Government and the Reserve Bank will be disappointed with this result. A lift in annual output growth from 1.6% to 1.7% is hardly a “gentle turning point” when private final demand contracted by 0.3% following a 0.1% contraction in the June quarter.

Despite a solid boost to incomes, the cautious consumer has chosen to lift its savings rate and hold spending effectively flat. The lift in savings is over and above the policy stimulus - suggesting heightened risk aversion.

It seems likely that the Reserve Bank will need to lower its optimistic growth forecast for 2020 of 2.8% given it is underpinned by a lift in consumer spending growth to 2.4% (compared to the current 1.2%) and a 6.2% lift in business investment.

As discussed, that compares with the Reserve Bank’s forecast in November of 2.8%. Accordingly, we expect that the RBA, while unlikely to follow Westpac’s forecast exactly, will revise down its 2020 growth forecast from 2.8% to 2.5%. A revision in growth from trend to below trend would represent an appropriate opportunity to deliver on the next rate cut from 0.75% to 0.5%.

We expect that cut will be eventually followed by a further cut in June to 0.25%, a little after the Commonwealth Budget which will be released on May 12.

Westpac has argued strongly that the Commonwealth government should bring forward the personal income tax cuts which have been legislated to begin from July 2022. Such a policy initiative would boost the consumer spending profile through the second half of 2020 and in 2021.