Australia in 2019: soft growth, falling house prices and RBA rate cuts

  • Weaker regional and global growth is ill-timed for Australia
  • Consumer debt levels and house prices have reached high levels
  • Two 25 bp rate cuts can be expected in July and August

Weaker regional and global growth is ill-timed for Australia, given downward local pressures coming from the consumer and from housing.

Following a 27-year uninterrupted growth run, consumer debt levels and house prices reached high levels. But with wage growth and household savings both low, consumers are in a vulnerable position; sentiment has recently slipped to below-average levels and a softening in the labor market or further falls in house prices could cause consumers to rebuild precautionary savings. On the housing front, both dwelling prices and residential construction look set to record further falls under the combined weight of earlier prudential tightening measures, reduced foreign buying, more cautious bank lending and uncertainty regarding future tax changes, with a national election likely in May.

On balance, we look for below-consensus and below-potential GDP growth of around 1.9% this year and expect the unemployment rate to rise over the next six months. In turn, we expect inflation to continue to drift below the bottom of the Reserve Bank’s 2-3% inflation target band, and look for two 25 basis point rate cuts over this period, most likely in July and August.

This suggests a positive outlook for AUD rates at the front of the curve. We are somewhat surprised by the strength of the recent rally in these rates, as our view has come to be embraced by many, but advocate a buy on dips approach here. Our view also implies caution on the AUD; we think this could trade in a 68-70c range over coming months.

Contributor

  • Andrew Ticehurst

    Rates Strategist, Australia

Disclaimer

This content has been prepared by Nomura solely for information purposes, and is not an offer to buy or sell or provide (as the case may be) or a solicitation of an offer to buy or sell or enter into any agreement with respect to any security, product, service (including but not limited to investment advisory services) or investment. The opinions expressed in the content do not constitute investment advice and independent advice should be sought where appropriate.The content contains general information only and does not take into account the individual objectives, financial situation or needs of a person. All information, opinions and estimates expressed in the content are current as of the date of publication, are subject to change without notice, and may become outdated over time. To the extent that any materials or investment services on or referred to in the content are construed to be regulated activities under the local laws of any jurisdiction and are made available to persons resident in such jurisdiction, they shall only be made available through appropriately licenced Nomura entities in that jurisdiction or otherwise through Nomura entities that are exempt from applicable licensing and regulatory requirements in that jurisdiction. For more information please go to https://www.nomuraholdings.com/policy/terms.html.

Suggested views

Back to top icon-back-to-top-arrow