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GDP data will back RBAs ‘gentle turning point’, economists say

3 min read
http://www.afr.com/markets/equity-markets/gdp-data-will-back-rba-s-gentle-turning-point-economists-say-20191201-p53fq6

“Company profits and inventories should be supportive for GDP, while the monthly trade numbers also suggest the external sector will be a tailwind for growth,” said JPMorgan economist Tom Kennedy.

“We have little visibility on public capex and consumption through the quarter, though the data at hand indicate these sectors should also deliver a modest positive impulse to third-quarter growth.”

JPMorgan is slightly above consensus in terms of GDP estimates, putting economic growth at 0.6 per cent for the quarter.

Still, that’s a downgrade from an earlier forecast of 0.65 per cent, which was made before disappointing capital expenditure figures were released last week.

The 0.2 per cent decline in private capex over the third quarter fell below the flat reading economists had been expecting.

Equipment spending fell to a greater extent than Westpac’s economics team had anticipated, down 3.5 per cent compared with a forecast of 1.5 per cent.

“Capex plans for fiscal 2020 have been downgraded, largely led by services. Business capex plans are lopsided, with strength in mining and weakness in services,” said Westpac economist Andrew Hanlon.

“Our forecast for third-quarter GDP remains 0.6 per cent and 1.8 per cent year-on-year  with risks tilted to the downside.”

But Citi’s Josh Williamson is expecting GDP to print at a below-consensus 0.4 per cent for the quarter following what they expect as “only mild household consumer spending growth of 0.3 per cent”.

Mr Williamson said that if the data printed at 0.4 per cent, it “will make it harder for the Reserve Bank’s 2019 year-end 2.3 per cent yearly GDP forecast to be achieved”.

Nomura economist Andrew Ticehurst said that a quarterly reading of 0.6 per cent and an annual print of 1.8 per cent year-on-year, which Nomura was expecting, would allow the central bank to stick with its “gentle turning point” narrative for the economy.

Three interest rate cuts since June, along with tax help for low to middle-income earners and fewer lending restrictions for home borrowers, may enable the Australian economy to continue its record-breaking run of unbroken economic growth.

The Reserve Bank is unlikely to cut rates again when it meets on Tuesday.  Futures markets are pricing in a low 7.8 per cent chance of a 25 basis point interest rate cut from the central bank in December,

“We expect the RBA to be on hold in December, as it assesses the effects of the 75 basis points of cuts already delivered,” said Paul Bloxham, chief economist for Australia and New Zealand at HSBC.

“There is clear evidence that the [rate] cuts are pumping up the housing market, but few signs of the boost spreading beyond this as yet,” he said.

For Mr Bloxham, last week’s speech from RBA governor Philip Lowe was crucial in cementing his on-hold forecast for December. He noted that Dr Lowe passed up the opportunity to signal a possible December cut.

“Given the RBA has adopted more explicit forward guidance in recent times, governor Lowe’s lack of signalling for December is a strong indication that a cut next week is unlikely,” the economist said.

Any RBA inaction in December may not last, however. Markets predict a 57 per cent chance of a rate cut to 0.5 per cent at the bank’s February meeting, while there’s a 29 per cent chance of rates hitting 0.25 per cent by June, according to futures pricing.

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