The Reserve Bank has cut its forecasts for economic growth and inflation for the next year to 18 months, revealed concerns about the state of the jobs market ahead of next week’s contractionary federal budget, and now reckons the economy will grow at below trend rates for the next year to 18 months.

All in all it’s a picture of an economy that will be soft, see no real growth in exports and more trade deficits as a result. The only saving grace may be that if this outlook comes to fruition, then the downward pressure on the value of the Australian dollar will increase, which could relieve some of the pressure. But the current situation is being supported not by fundamentals in the economy, but by demand from offshore investors for high-yielding investments as Europe’s woes continue to worry markets.

In fact, the outlook and state of the economy’s health painted in the forecasts is enough to ask the question — can the economy survive the Gillard’s government’s deficit fetish without suffering further downward pressure on activity that even more rate cuts won’t be able to correct quickly to avoid a slump?

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The forecasts are contained in the bank’s second Statement of Monetary Policy for 2012, released this morning. A feature of it, besides the expected reductions in the growth and inflation forecasts, were the comments on employment.

“Labor market conditions have continued to be on the soft side to date, with large increases in employment in mining and some service industries roughly offset by declines in the manufacturing, hospitality and retail sectors,” the bank said.

And the bank sees a definite downside risk from a rise in jobless this year as labour shedding by companies increases.

“There are both upside and downside domestic risks to the outlook for activity. Labour shedding in a number of relatively employment intensive industries, including manufacturing, retail trade and residential construction, may accelerate as firms continue to adjust to the higher level of the exchange rate, shifting patterns in consumption demand and the weak near-term outlook for dwelling investment.”  The bank said the upside risk is next year if the demand for labour proves to be too strong as the resource investment boom hits even higher levels.

That’s not the news the federal government and Treasurer Wayne Swan will want to hear as they prepare to slash or defer spending by tens of billions of dollars in next Tuesday’s 2012-13 budget. Nor is this forecast about the housing sector: “A recovery in housing construction is unlikely in the near term.” That will be bad news as well for state governments, which depend on stamp duty income from house sales and construction.

The trend growth rate for the Australian economy is about 3.25% (annual). For the 2011-12 year it is put at 2.75%, down from the forecast in the February statement of 3.25%, while for calendar 2012, the forecast has been cut to 3% from 3.25%. For the all important 2012-13 financial year, the RBA has growth steady at 3% to 3.25%. That would indicate sees only a slow improvement in the second half of the 2013 financial year.Consumer Price Inflation is forecast to rise by 1.25% in the year to June  this year, down from the February forecast of 1.75%. For the year to December, the forecast is 2.5%, down from the 3% forecast. Underlying inflation is forecast to be lower: 2% versus 2.25% in the February forecast and 2.25% instead of 2.75% in calendar 2012. That means the central bank sees little rise in underlying inflation during the year from the 2.15% average reported in the March quarter inflation data.

And while the RBA sees inflation remaining at or around the low levels in the March quarter, the bank remains suspicious, saying in the statement’s list of upside and downside risks to the economy that there are chances the low level of rates won’t last, especially if productivity improvements don’t happen and the impact of the downward pressure from the high level of the dollar ease, or companies try to rebuild profits margins after the recent slide (as we are seeing in retail, travel, building products and property and housing).

In addition, it expects exports to be weaker for the next year or so, (and no real recovery in the housing sector), and for the investment boom to be much stronger than forecast in February, hitting 9% of GDP in the 2013 financial year, against the average of 2% over the past decade.

The bank also forecasts no growth exports, saying: the bank’s expectation for total export “growth has been revised lower over the forecast period. This partly reflects a softer outlook for manufacturing exports, and a reassessment of the extent to which resources companies can utilise new port and transport capacity over the next few years.”

The revisions reflect and support the bank’s 0.50% cut to its cash rate on Tuesday. There are no clear signals that we will get another rate cut, but the commentary on the jobs market suggests that the bank will now be watching the monthly jobs reports (and the job ads report from the ANZ, which showed a 12% rise in ads in the first quarter). The ANZ report for April is on Monday, the ABS jobs data for the same month is out on Thursday. As well we get retail sales for March and the first quarter, and building approvals, plus the trade figures (also for March and the first quarter).

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Peter Fray
Peter Fray
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