Australia: Conflicting forces with rates on hold - Nomura

Andrew Ticehurst, Research Analyst at Nomura, suggests that they see trend-like growth and, with ongoing spare capacity and subdued inflation, forecast an unchanged cash rate through 2018 for Australian economy.

Key Quotes

“Activity:

• Partial data suggest trend-like GDP growth in Q3. Retail sales were soft, despite discounting, and suggest weakening discretionary spending. Consumers are likely feeling the impact of high debt levels, modest wage growth and higher (nondiscretionary) energy costs. However, net exports look to have added to Q3 GDP, with higher export volumes more than offsetting higher import volumes and both consistent with respectable growth. Strong job growth and rising hours worked also suggest continued growth in Q3.
• In terms of the outlook, we see some conflicting forces. On the upside, solid global growth provides a healthy backdrop for exports and increased government infrastructure spending is also positive. At the same time, we judge that the Australian expansion is somewhat “old and tired” after 26 years without a recession, with key interest-sensitive sectors – consumer spending and dwelling construction – set to underperform. With offsetting forces, Australia looks to be a relative underperformer, and we still struggle to see materially above-trend growth.”

“Inflation: Q3 CPI inflation again undershot expectations and the details showed a lack of breadth in price growth; the result was also consistent with the broader global trend. The recent national wage case decision to boost wages to lower paid workers should add a few tenths to wage growth from Q3 and a very shallow decline in the unemployment rate could also push CPI inflation slightly higher over time. While inflation has likely troughed, this cyclical pick-up may well be impacted by broader structural, global and technological forces pushing in the other direction.”

“Policy: The RBA continues to balance growth, inflation and financial stability objectives. Its latest policy press release (7 November) remained balanced and again gave no hint of any policy bias, in our view. With inflation still below target, global inflation generally undershooting expectations and the housing market appearing to lose a little momentum lately, we think it will remain patient and leave the cash rate unchanged through 2018.”

“Risks: The main downside risks stem from domestic housing, the global market or a (medium-run) China dislocation. Higher commodity prices, stronger-than-forecast capex and continued strong employment reports are upside risks.”