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Free AccessANALYSIS: RBA's Optimism Masks Key Risks From H'Hold Spending
By Sophia Rodrigues
SYDNEY (MNI) - Despite the headwinds from a higher exchange rate and
cash-rate rise built into forecasts the Reserve Bank of Australia presented one
of its most optimistic forecasts for the economy -- slightly lowering the growth
forecast in the near-term but raising it to above-trend growth in the latter
part of forecast period.
The RBA also raised its headline inflation forecast for 2018 while leaving
underlying inflation forecasts unchanged.
Contrary to what many expected the risk to the forecast doesn't come from
the current elevated level of the exchange rate but rather from any future
gains.
"It is possible that the Australian dollar could appreciate further which,
if sustained, would be expected to result in a slower pickup in economic
activity and inflation than currently forecast," the RBA said.
The RBA said that based on historical relationships a 10% appreciation of
the trade-weighted exchange rate that is not associated with higher commodity
prices would be expected to lower inflation by a little less than half a
percentage point over each of the following two years. Output would be expected
to be lower by 0.5% to 1% in around two years, it added.
Key to the updated forecasts is continued expectation of a "bit above
average" growth in household consumption -- an assumption that appears
optimistic if any of the several headwinds to households detailed by the RBA
come to pass.
This is the main reason why the RBA cited household spending as the main
source of uncertainty for its forecasts.
"Domestically there is the risk that household spending growth could be
more constrained than expected by low real wage growth and high debt levels,"
the RBA said.
Interestingly, the RBA nominated "future" exchange rate movements among
"other key sources of uncertainty" for the domestic economic and inflation
outlook along with the strength of recovery in nonmining investment and how
quickly wage growth responds to a decline in spare capacity in the labor market.
Supporting the RBA's growth forecast is also "reasonably strong government
spending" that has been built into the forecast which reflects the significant
pipeline of public infrastructure work -- though the RBA pointed out that the
timing of expenditures on projects can be hard to predict.
There appears to be a downgrade to the forecast for dwelling construction.
The RBA said contribution to GDP growth from dwelling investment over the
forecast period is expected to be minimal. For this, too, the RBA cited downside
risk if apartment construction approved mainly in the eastern states do not
commence because of weakness in prices.
If this risk comes to pass, it could hurt household spending too, the RBA
said.
The RBA's assumption for growth in household consumption is mainly due to
expectations that total hours worked would continue to increase and employment
would continue to increase.
"However, ongoing expectations for low real wage growth remain a key
downside risks for household spending," the RBA said.
Another risk is that the recent sharp increase in price of utilities could
have a larger effect on the consumption decisions of lower-income households,
the RBA said.
Consumption growth could also be affected by large, unexpected rises or
falls in housing prices. At the same time, elevated debt levels remain a risk
because households would choose to pay down debt faster and cut their
consumption.
The outlook for headline inflation is slightly higher versus May to reflect
an upward revision to expected utilities prices. The RBA also expected this to
have some indirect effect because it would raise input costs of businesses,
though competitive pressures could limit their ability to pass on costs.
The RBA continues to expect wage growth to pick up gradually over the next
few years and downward pressure from heightened retail competition.
The RBA has also factored in the effect of the appreciation in the exchange
rate since May. If sustained, this will put further downward pressure on retail
prices over the year ahead. Low rent is another factor keeping inflation low.
Among the risks to inflation the RBA cited uncertainty about the extent of
spare capacity in the labor market and how employment-intensive future GDP.
The RBA also cited subdued core inflation in many economies as a downside
risk.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MT$$$$]
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.