MNI INSIGHT: RBA Unfazed By Data Dip, Keeps Upbeat 2019 View

--Slowdown In Q3 GDP Data Seen By RBA As Statistical Anomaly

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia remains positive in its 2019

outlook for the domestic economy, despite unexpectedly weak signals from recent

economic data and downside risks overhanging the housing market, MNI

understands.

     Although overestimating recent September quarter GDP data and seeing an

unexpected uptick in November's unemployment level, the RBA is sticking with its

policy stance, which is for a stronger local economy to gradually create the

conditions for a rise in official interest rates.

     While recognising potential risks from a falling local housing market and a

possible credit squeeze from the major banks, the RBA is still anticipating a

soft landing for the housing market.

     September GDP was an annualised 2.8% against the Bank's expectation, as

discussed at its Board meeting on December 4, for a figure above 3%, while

unemployment added 0.1% to 5.1% in November data released this week.

     MNI is led to believe that the Bank does not view these results as pointers

to a faltering economic recovery, but sees statistical anomalies delivering

atypical data results. On GDP growth, for instance, factors such as the recent

changes to Government payments around childcare funding and a lag in new mining

investment are seen as having contributed to a flatter result.

     In terms of the global outlook, the Bank is understood to have expected the

recent rate hike by the US Federal Reserve to the 2.25% to 2.5% range, seeing it

as an appropriate response to the buoyant US economy.

     The RBA cut rates to a record low 1.5% in November 2016 and has maintained

them at that level as a driver for growth. 

     -BOUNCE BACK

     The expectation is that December quarter and 2019 growth will revert to 3%

and above.

     The unemployment figure of 5.1%, meanwhile, is attributed to a higher

participation rate of 65.7% which meant the overall rate increased, despite the

creation of 37,000 new jobs in November.

     More significant for the RBA is the fact that there are now 12.69 million

Australians employed, a national record, and the expectation is that this will

flow through to wages growth as the economy soaks up spare capacity.

     Central to the RBA outlook is the view that higher wages will increase

consumer spending and push inflation from the current 1.9% to within the Bank's

target range of between 2 and 3%. The Board minutes noted that the wage price

index (WPI) increased by 0.6% in the September quarter to be 2.3% higher over

the year.  

     --HOUSING RISK

     While recognising the downside risk in a weaker housing market, the RBA

does not believe that falling property prices in Sydney, where prices have

fallen 9% since their July 2017 peak, will create a national rout which would

lead to an undermining of consumer confidence and spending.

     MNI understands the RBA view is still that the housing market needed

stabilisation after the boom period between 2015 and 2017, and that the current

downturn is a natural correction, with investor activity now in decline.

     While maintaining its positive view, the Bank is watching the housing and

lending markets closely as the sector with the highest risk.

     As RBA deputy governor Guy Debelle said at a public event earlier in

December, for house prices to be falling at a time of record low interest rates

is "uncharted territory" for the Australian economy.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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