Australia GDP slowdown opens door wide for rate cuts this year

SYDNEY (Reuters) - Australia’s top central banker sounded sanguine about a sharp slowdown in the country’s property market on Wednesday saying it was unlikely to derail momentum even as data showed the $1.3 trillion economy hit an airpocket last quarter.

FILE PHOTO - Worker Noa Utumaru checks the production line at the factory of the Australian company Impact International, which designs and manufactures food, cosmetic and pharmaceutical tubes for domestic and international clients, located in western Sydney, Australia, February 6, 2017. REUTERS/David Gray/File Photo

Domestic activity slowed sharply in the second half of last year, the figures released on Wednesday showed, with gross domestic product (GDP) rising 0.2 percent in the December quarter following a sub-par 0.3 percent in the previous three-month period.

Annual GDP rose a below-trend 2.3 percent, the slowest pace since mid-2017 and confounding expectations for a 2.5 percent increase.

The dismal figures sent the Australian dollar to a two-month trough of $0.7029 as investors wagered the Reserve Bank of Australia (RBA) would ease policy to stimulate the economy.

“We think rate cuts this year, while not guaranteed, are now more likely than not,” said Nomura economist Andrew Ticehurst in a report.

Ticehurst cited weak regional and global growth and debt-laden consumers in a deteriorating housing market among reasons for his bearish case.

“We expect another round of material growth forecast reductions from the RBA and see an increasing risk that inflation continues to fall short of the target band for an extended period,” he added.

Australia’s top investment bank Macquarie also revised its rate outlook to two cuts this year from no change previously, as did JPMorgan.

“With growth now below trend, the labour market will soon start softening. So, you can support the economy with further cuts,” said Macquarie economist Ric Deverell.

Interest rate futures have moved too, now pricing in a 100-percent chance of a cut to the 1.50 percent cash rate this year from an 86 percent probability on Tuesday.

The RBA drifted away from its previous tightening bias last month to a neutral stance, although recent comments and reports from the central bank show the outlook on the economy remain broadly optimistic. It expects growth to pick up to around 3 percent this year, a forecast many economists believe will be downgraded in the months to follow.

A revival in business investment, strong government spending, higher commodity prices and a still robust jobs market are among reasons for the RBA’s optimism.

But dark clouds are now gathering as the house price slowdown hits dwelling investment and construction activity in Australia’s two biggest cities of Sydney and Melbourne. The property downturn is also expected to further weigh on already-stretched household balance sheets.

At the same time, wage growth is slow and there is still a fair degree of spare capacity in the labour market.

On a per capita basis, GDP fell in December and September quarters, marking only the third time in the past 30 years per capita activity contracted for two consecutive quarters. The last time that happened was in 2006.

RBA Governor Philip Lowe still believes there is fire left in Australia’s economy which has not had a recession since 1991.

“The adjustment in our housing market is manageable for the overall economy. It is unlikely to derail our economic expansion,” he said in a speech in Sydney before the GDP data on Wednesday.

While focussing on economic bright spots, Lowe emphasised current monetary policy settings were “clearly stimulatory.”

“We have the flexibility to adjust monetary policy in either direction as required,” he said. “At the moment, the probabilities appear reasonably evenly balanced.”


Defying the gloom, higher prices for Australia’s resource exports boosted corporate profits and GDP in current dollar terms, which in turn provides a windfall to tax revenues.

As a result, nominal GDP climbed 1.2 percent in the quarter and a rapid 5.5 percent for the year.

The stellar nominal growth has led many economists to speculate the government will shower tax sweeteners on households, including one-off cash transfers ahead of state and federal elections in coming months.

“Fiscal stimulus is the key risk to our forecast for two rate cuts this year,” said Sally Auld, Sydney-based chief economist at JPMorgan

“The government has a bit of spare money up its sleeve. If they deliver a large pre-election spending for households that will enable the RBA to stay on hold for the forseeable future.”

($1 = 1.4168 Australian dollars)

Reporting by Swati Pandey; Editing by Sam Holmes