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Reserve Bank of Australia shows confidence of Australia’s Economic Future

22 Nov 2018

While consumption growth is still identified as a source of uncertainty, the Board expects it to remain around the 3% level over the next few years that we have seen recently. Household disposable income growth is also forecast to increase at that rate.

NOTICABLE WAGE GROWTH

It is noted that there has been a noticeable pick-up in wages growth in most advanced economies, and Australia requires “a gradual increase in wages growth for inflation to be sustainably within the target range”.

GDP growth and labour market conditions had been stronger than the Bank had expected over the last twelve months. Accordingly, the forecast for the unemployment rate had been lowered to 4 ¾ per cent from 5 per cent by mid-2020, with an implied downside risk to that forecast.

Despite a disappointing capex survey, non-mining business investment was expected to continue to make a significant contribution to output growth supported by above average business conditions and the significant pipeline of non-residential construction work.

CONSUMPTION AND INCOME GROWTH WILL BE ALIGNED

The Board also discussed the Bank’s forecasting performance over the previous year, noting that forecast errors were smaller than historical averages with GDP growth and business investment surprising to the upside, the terms of trade average being higher than expected, and the marked depreciation in the Australian Dollar.

CONCLUSION

By noting that market pricing is not expecting a policy adjustment for the next year, the Bank does appear to be extremely patient with its next policy move. Westpac expects that their growth forecast for 3 ¼ per cent growth in 2019 is too high, mainly because of an expected downturn in residential construction, a slowdown in consumption growth associated with weaker income growth and some wealth effects. That development alone is likely to take the edge off the expectation of rising wages and higher inflation.

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