RBA edges down growth outlook, sees gradual inflation rise

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RBA edges down growth outlook, sees gradual inflation rise

People walk past the reserve bank of Australia in sydney.

The Reserve Bank has slightly downgraded it outlook for economic growth in Australia while signalling only a gradual rise in headline inflation.

In its quarterly statement on monetary policy released this morning, the RBA sees growth in December 2017 of 2.5 per cent easing back from 2 to 3 per cent in the previous forecast issued in August.

Looking a year ahead to December 2018, the central bank sees economic growth of 3.25 per cent down from a previously forecast peak of 3.75 per cent.

However, the RBA sees the economy expanding at “a solid pace” over the next few years and cites positive labour market developments with a slightly lower than forecast jobless rate of 5.5 per cent in 2018 and 2019.

“The drag on growth from the end of the mining boom has eased and is likely to end some time in the next year or so,” the RBA’s statement said.

But inflation and wages growth remain a sticking point with the RBA warning that both will rise “only gradually over time”.

The weaker outlook for rising inflation adds to expectations that the Reserve Bank will leave the cash rate on hold at the historic low of 1.5 per cent indefinitely.

The Reserve Bank sees headline inflation creeping slightly higher to 2 per cent in December 2017 and not touching 2.25 per cent until December 2018.

RBA forecasts Jun 2017 Dec 2017 Jun 2018 Dec 2018 June 2019 Dec 2019
GDP growth 1.8pc 2.5pc 2.75pc 3.25pc 3.5pc 3.25pc
Unemployment rate 5.6pc 5.5pc 5.5pc 5.5pc 5.5pc 5.25pc
CPI inflation 1.9pc 2pc 2pc 2.25pc 2.25pc 2.25pc
Underlying inflation 2pc 1.75pc 1.75pc 1.75pc 2pc 2pc

Low wage growth remains a drag

The statement signalled that sluggish wages growth and looming competitive threats to the soft retail sector like Amazon were keeping a lid on inflation.

“Strong competition in the retail sector is dampening retail inflation across a broad range of goods,” the RBA said.

The RBA noted there are “important questions” about whether an anticipated tightening in the market might increase labour costs and feed into inflation.

Headline inflation is currently stuck at 1.9 per cent, below the RBA’s target band of 2 to 3 per cent over time.

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The RBA said higher tobacco and electricity prices have helped push inflation higher and “are expected to continue to do so”.

Measures of underlying inflation, which strip out on volatile items, remains below that target at 1.75 per cent in December 2018 and 2 per cent in December 2019.

Australia’s terms of trade are forecast to fall, though above a trough recorded in 2016, with Chinese demand for steel expected to weaken.

Household consumption is expected to pick up gradually, but the RBA said high levels of household debt and weak wages are constraining factors.

“The slow growth in household income has been driven primarily by unusually soft outcomes for average earnings of employees,” the statement observed.

“Shifts in the composition of employment within industries to lower paid work might partly explain this.”

Australian wage growth has been uncomfortably slow, averaging around 2 per cent in recent quarters.

China and construction to support growth

The RBA sees growth in China to be stronger than earlier expected with construction activity “remaining robust”.

However it says environmental policies might temporarily reduce Chinese demand for iron ore and coking coal.

Despite the positive outlook, the RBA sees China’s economy slowing slightly in coming years as the working age population declines and authorities show more caution in using fiscal stimulus to maintain growth.

On housing, the RBA says dwelling investment has peaked earlier than expected, but is anticipated to remain at a high level for the next few years.

The RBA says the housing market has eased nationally and notably slowed in Sydney.

The RBA says housing supply will continue at an above-average rate and could weigh on housing prices and rents in some real estate markets.

Follow Peter Ryan on Twitter @peter_f_ryan

Topics:

economic-trends,

money-and-monetary-policy,

currency,

australia

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