By Michael Heath - May 4, 2012 8:37 AM GMT+0700
The Reserve Bank of Australia cut growth and inflation forecasts as weak labor and housing markets keep price gains in check, underscoring its decision this week to cut interest rates by the most in three years.
“Labor market conditions have continued to be on the soft side to date, with large increases in employment in mining and some service industries roughly offset by declines in the manufacturing, hospitality and retail sectors,” the central bank said today in its quarterly monetary policy statement. “A recovery in housing construction is unlikely in the near term.”
The central business district is seen illuminated at dawn alongside the Harbor Bridge in Sydney. Growth in Australia, the only major developed economy to avoid a recession over the past 20 years, is weakening as output slows in China, its biggest export market. Photographer: Ian Waldie/Bloomberg
The RBA sees average growth of 3 percent in 2012, down from its February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is predicted at 2.25 percent from a previous 2.75 percent, the central bank said. The estimates are based on the overnight cash rate target remaining at 3.75 percent, it said.
The revisions reflect RBA Governor Glenn Stevens’s decision three days ago to slash the benchmark rate by half a percentage point to a two-year low, even as most economists polled forecast a quarter-point reduction. The RBA is trying to buttress a housing market in which prices have fallen for five straight quarters, bolster employment as a high currency hurts non- resource industries and boost confidence that has weakened among consumers who are saving more.
The Australian dollar was at $1.0259 as of 11:32 a.m., little changed from before the RBA statement. It was heading for a 2 percent drop since April 27, which would be the biggest weekly slide this year.
‘Subdued Growth’
“The assumed high level of the exchange rate and a weak short-term outlook for building construction are expected to result in subdued growth outside of the mining sector in the near term,” the RBA said. “Growth in household spending moderated at the end of 2011 and partial indicators suggest that it remained soft in early 2012.”
Australia’s four biggest banks are trying to guard margins against further erosion from elevated wholesale funding costs, by passing through less of the central bank’s rate cuts to mortgage holders. The RBA lowered rates twice late last year by 25 basis points.
The RBA said today that its half percentage-point cut this week was made “in order to deliver the appropriate level” of borrowing rates. “The board judged that it was desirable for financial conditions to be easier than those which had prevailed in December, and that this required a 50 basis point reduction in the cash rate.”
Tradables Inflation
The nation’s unemployment rate has held at about 5.2 percent for the past six months, less than half the level in Europe, even as the currency’s strength hurts manufacturing and tourism.
The central bank, explaining the revision of the inflation outlook, said it expects the decline in the price of international goods to diminish given the exchange rate has been little changed for a year. A weakening in domestically produced inflation will rely on moderate wage growth due to a weaker labor market and improved productivity as companies respond to the heightened competitive pressure caused by the exchange rate, it said.
The central bank described inflation last quarter as “unusually low.”
Budget Cuts
The economy will also have to absorb the biggest fiscal contraction as a proportion of gross domestic product since at least the fiscal year that started in July 1953. The government is seeking to return the budget to surplus in the fiscal year beginning July 1. It will deliver the budget May 8.
The RBA noted the plan, saying “public final demand is also expected to grow at well below-trend rates over the forecast period as both federal and state governments undertake fiscal consolidation.”
Australia’s economy is struggling to accelerate, unexpectedly posting back-to-back trade deficits as coal and metal exports slumped. The RBA said today that “exports have been revised lower, largely reflecting a reassessment of the ability of mining companies to utilize new transport and port capacity fully in the near term, along with weaker manufacturing exports.”
The Australian dollar has risen in six of the past seven quarters. Tourism, manufacturing and retail industries have weakened under the currency’s 41 percent rise in the past three years.
Traders are betting there’s a 74 percent chance Stevens will lower rates by a quarter point to 3.5 percent at the next meeting in June, according to swaps data compiled by Bloomberg.
Resource Bonanza
Even after this week’s rate cut, Australia has the highest borrowing costs among major developed nations as Stevens seeks to manage an economy powered by demand from emerging nations including China and India for iron ore, coal and natural gas. Chevron Corp., Royal Dutch Shell Plc, Woodside Petroleum Ltd. and ConocoPhillips are among energy companies spending $180 billion to explore and develop gas fields in Australia.
The RBA said the outlook for mining investment has been revised higher since its last statement as its liaison suggested some projects previously seen as “only possible now look more likely to go ahead than had been previously assumed, and that work on some other projects is progressing at least as fast as was expected.”
The central bank said the biggest offshore risk to its forecast is that Europe’s sovereign debt crisis could intensify and derail the upswing in the global economy. Global growth is expected to be 3.5 percent this year and 4 percent next year, it said.
“While the likelihood of that occurring has eased somewhat in recent months, partly because of the actions of authorities in Europe, the situation remains fragile,” the central bank said in the statement.
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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