By Shane Wright
December 3, 2019 — 7.30pm
The Morrison government’s financial message is set to receive a boost on Wednesday, with key data tipped to show exports and public infrastructure spending are lifting the economy even as expectations grow the Reserve Bank will cut interest rates to just above zero.
RBA tipped for deeper rate cuts in 2020 even as economy lifts
Deeper may refer to:
The gross domestic product (GDP) result is forecast to show the economy expanding 0.6 per cent in the September quarter, taking annual growth to at least 1.7 per cent, a step-up from the decade-low figures of the previous three months.
Balance of payments data on Tuesday showed exports, led by iron ore and liquefied natural gas, will add 0.2 percentage points to GDP through the quarter while government spending is expected to deliver a similar lift. They will help offset what is expected to be soft household consumption, which has been most evident in the retail sector, where the volume of sales was down 0.1 per cent in the September quarter.
The trade figures also confirmed the softness of the domestic economy, with capital good imports – effectively machines and equipment for the business sector – dropping 5.6 per cent over the past three months as firms wound back their investment plans.
Despite the general softness, the RBA board left official interest rates at a record low of 0.75 per cent at its last meeting of the year on Tuesday.
RBA governor Philip Lowe said it appeared the housing market, particularly in Sydney and Melbourne, was responding to the three rate cuts delivered since June. That lift in prices should feed into the broader economy, he said.
“It has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which in time will boost household spending,” he said.
The central bank believes the economy has reached a “gentle turning point” and expects growth to reach 3 per cent by 2021. But a growing number of economists believe the RBA will have to take rates even lower to meet its targets.
Asia-Pacific economist with online jobs site Indeed, Callam Pickering, said the GDP figures would show the economy’s growth was narrowly based, effectively reliant on Chinese demand for Australian iron ore and coal. The RBA’s desire for much lower unemployment and higher wages growth was “years away” based on current policy settings, he said.
“A healthy and vibrant economy though needs a much broader base of growth. We need a strong household sector and greater investment from businesses,” he said. “Much more needs to be done whether it be through further rate cuts, unconventional monetary policy or, in an ideal world, fiscal stimulus.”
Commonwealth Bank of Australia now expects the official cash rate to be sliced to 0.25 per cent by the middle of next year. CBA economist Belinda Allen said while a cut at the RBA’s first meeting of 2020 had been expected, a follow-up cut was now likely.
“This would take the cash rate down to the confirmed effective lower bound,” she said.
HSBC senior economist Paul Bloxham said he believed the RBA would have the cash rate at 0.5 per cent by the middle of next year. “It seems unlikely that a ‘gentle’ turning point and still below-trend growth will be enough to get the unemployment rate to fall and wages and inflation to lift,” he said.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.