Economic outlook - September 2016

The Reserve Bank of Australia (RBA) cut the official cash rate by 0.25% to 1.5% at its August board meeting, having last cut rates by the same amount in May. As with the previous easing, it follows lower than expected inflation figures which show inflation at 1%, well below the Bank’s target of 2-3%. The RBA made specific reference to low wages growth and subdued inflation in Australia and the rest of the world, and the likelihood this would persist for some time.

With interest rates so low, an area of concern for the RBA has been housing construction and house prices. This concern appears to have receded with the statement accompanying the rate cut noting that “dwelling prices have been rising only moderately over the course of this year” and that bank lending has been more cautious in certain segments, namely multi-unit developments. As a result, the RBA does not believe the rate cut will increase risks in the housing market.

The Australian growth outlook remains constrained by still sluggish consumer spending and investment. Consumer sentiment has been lacklustre for some time with a lack of wages growth and a desire by households to control debt limiting spending, despite the extremely low interest rates. Nevertheless, GDP growth is likely to be maintained above 2.5%, with exports providing support.

Internationally, the most significant news of the past quarter was the UK vote to leave the European Union. While the logistics of the exit are likely to take up to 2 years, the economic impacts are expected to be felt sooner. The International Monetary Fund (IMF) believes UK growth is likely to be only 1.3% in 2017, compared to their previous forecast of 2.9%. In contrast, European growth was downgraded only slightly to 1.4%, while global growth was left largely unchanged at 3.4%.

Reflecting the heightened risks to UK economic growth and the need to support confidence, the Bank of England cut interest rates to 0.25% in early August – the lowest level in the Bank’s 300 year history. This is also the first rate decrease in seven years and follows expectations earlier in the year the Bank was actually on the verge of increasing interest rates. Clearly, Brexit has changed things significantly for the UK.

In the US, GDP growth for the June quarter was lower than expected showing the economy growing at little more than 1% compared to a year ago. This likely provides an overly pessimistic view of the underlying growth rate of the US and reflects the volatility seen over the past few years which has seen growth slump to around 1% a number of times before rebounding to 3%. Other economic data such as the ISM manufacturing survey, consumer confidence and employment suggest US growth of 2-2.5% in the immediate future. Expected interest rate increases in response to improving growth have been delayed, but it is still possible the US Federal Reserve will increase rates before the end of the year.