The 2 US cent lunge by the Aussie dollar towards parity with the greenback has overshadowed the Reserve Bank’s small easing in its second lot of growth and inflation forecasts for 2013 and 2014 in the second Statement of Monetary Policy for the year, released today.
While the RBA is clearly cautious about the outlook (which helps explain why it surprised with a rate cut on Tuesday), it nevertheless isn’t a believer in the line that the economy is in mess or facing any sort of “emergency”. Indeed, down in the fine print of the outlook statement, there’s a note of optimism about consumer spending and housing that is at odds with the conventional wisdom from those armchair generals and experts in other parts of the media and the private/business analysts and economic brigade.
The bank’s forecasts are essential unchanged from February except the central bank sees growth in the year to June this year averaging 2.25%, down from the earlier forecast of 2.5%. By December, it sees growth back at 2.5%, slightly firmer than the previous range of 2-3%.
On inflation, the bank sees the Consumer Price Index falling to average 2.2% by June (3% previously) and 2% by December (2-3% previously). Underlying inflation is now estimated at 2.25% by June and December, down a quarter of a percent from February. This small fall is what gave the bank the room to cut rates this week. The RBA said:
“GDP growth is expected to be a bit below trend at around 21⁄2 per cent over 2013, before picking up to an around trend pace. Overall, the subdued outlook over the next year or so continues to reflect the approaching peak in mining investment, ongoing fiscal consolidation and the high level of the Australian dollar.”
But the bank also said in the latest forecast consumption spending “revised a little higher since the February Statement, as the prospects for household demand appear slightly more positive”.
“Retail sales have increased strongly over recent months and measures of consumer sentiment have been above average. Conditions and confidence in the established housing market have continued to improve, pointing to further growth in household wealth, while recent strong growth in both housing and personal loan approvals may provide some additional impetus to spending.”
“In contrast, moderate employment growth in the near term and slower growth in wages than in recent years is expected to continue to restrain growth in labour income.”
And contrary to the widely accepted view that the country’s trade account will be weak because of the high dollar and questions about iron ore and coil prices and Chinese GDP growth, the RBA seems to be more bullish:
“Notwithstanding little change to forecast growth in aggregate domestic spending, growth in imports is expected to continue to be somewhat softer than earlier expected. At the same time, the outlook for exports remains strong.”
But the central bank remains wary of the easing in resource investment and expectations of just when non-mining investment might start taking up the slack, especially investment in housing and commercial building construction.
“The forecasts for the Australian economy continue to embody a gradual shift in growth from mining investment towards exports, non-mining business investment and household spending. While there are signs that this rebalancing is beginning, there remains considerable uncertainty about how it will proceed.”
And the bank has sounded a note of caution about house prices and the expected upturn in home building:
“In the household sector, a key risk is that established dwelling prices rise more quickly than assumed, spurred by low interest rates. The associated boost to wealth and sentiment could in time generate stronger-than-expected consumption growth. If this were accompanied by a return to increasing household leverage, it would raise concerns from a financial stability perspective. But given the outlook for relatively subdued growth in employment and so for moderate wage inflation, it is possible that growth in labour income and spending could be weaker than currently envisaged. While the preconditions for an ongoing recovery in dwelling investment remain in place, there remains uncertainty about the breadth and strength of such a recovery.”
Internationally, the bank sees risks as balanced in the US, which is continuing a mixed recovery despite fiscal retrenchment by governments, but on the downside in Europe given the continent’s continuing problems.
The dollar is down under US1.02 this morning after falling sharply overnight as the US dollar jumped against yen, the Aussie, sterling and the euro. The dollar started the week above $US1.03, and fell to an 11-month low of $US1.005 before recovering to $US1.077 around 11.30 am, but it had been as high as $US1.0243 late yesterday following the release of the strong jobs report for April.
A fall below parity with the US dollar will be a welcome development for both trade-exposed sectors and governments. And while the bank, as usual, said it would “adjust the cash rate as appropriate to foster sustainable growth and low inflation,” it’s hard to see further rate cuts with a more sensibly-priced dollar and the bank’s current outlook.