GDP growth has come in weaker than the Reserve Bank of Australia previously forecast in December, with deputy governor Guy Debelle suspecting the main cause has been low growth in household income giving way to slowing consumption.
Stagnating wage growth has been a major contributor to slowing inflation, according to the RBA. It has called for a wage rise, while aiming for inflation to increase to a ‘sustainable’ target range of 2-3 per cent.
In a speech addressing the American Chamber of Commerce on Tuesday, Mr Debelle presented the RBA’s assessment of Australia’s current economic situation, noting tension between the differing states of GDP, labour and business conditions.
How the tension is resolved in the coming months will be an important determinant of the central bank’s positioning on monetary policy.
“The two lenses on economic growth provided by the labour market and the GDP data are in stark contrast,” Mr Debelle said.
“A third lens, in the form of business surveys, sits in between the two. Business conditions have declined from their high levels of the first half of 2018 but still remain consistent with around trend growth in the economy.”
While Australia’s GDP has been weak, the labour market has been strong, with the unemployment rate declining faster than the RBA had previously forecast.
The International Monetary Fund also predicted earlier this week that the Australian economy will grow by 2.1 per cent this year.
Mr Debelle also mentioned the decline in housing prices as a contributor to the slowdown, although he said it was not so much caused by the direct wealth effect of lower housing prices as much as it is from a low turnover in the property market.
“One puzzle related to the possible wealth effect is that the slowdown in household spending has been much more pronounced in NSW than it has been in Victoria, despite similar declines in housing prices,” Mr Debelle said.
“While population growth in Victoria is higher than in NSW, that doesn’t account for the whole difference.”
The RBA said more supply will come into the housing market in Sydney and Melbourne over the remainder of the year, which will further weigh on prices.
In his address, Mr Debelle also took note of global financial markets, with there being a marked decline in many asset prices at the end of 2018, while the global economy has continued to lose momentum this year.
Global growth initially slowed in the second half of 2018, with there being a decline in China and the euro area.
While GDP readings are not yet available for 2019, Mr Debelle said the loss of momentum is evident in business surveys of manufacturing conditions in many economies, although not as marked in services sectors.
“This potentially indicates that the drivers of the slowdown are more external rather than internal. Services say more about domestic demand, which has been more resilient,” Mr Debelle said.
Across Germany, Canada and the UK, GDP growth slowed in the fourth quarter of 2018 while the labour market remained strong.
In the US, GDP growth was around 2 per cent annualised in the final quarter, with employment growth almost as strong.
One explanation for the global economy’s slowing is China’s economic slowdown, Mr Debelle said, with the country’s clampdown on non-bank finance being a significant contributor particularly affecting the private sector.
He also cited escalation in trade tensions, with ongoing uncertainty about when China and the US are likely to settle.
The March quarter Consumer Price Index will be released in a few weeks.
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