Nomura

RBA growth downgrades are coming: is Australia’s luck running out?

  • Global and local headwinds are blowing more fiercely for Australia
  • We trimmed our growth and inflation forecasts earlier this month and we expect the RBA to do the same shortly
  • However, the RBA may not fully meet the market’s current dovish hopes; this would be positive for AUD and negative for AUD rates

Australia is known as the “lucky country”, with clear blue skies, white sandy beaches, abundant natural resources and 27 years of uninterrupted growth. However many are wondering whether Australia’s luck is running out, amid slower global and regional growth, tightening financial conditions and falling local house prices.

We noted last December that Australia would be “sailing into the wind” this year, and we revised down our GDP and CPI forecasts a few weeks ago. A softening housing market is the main local downside risk; dwelling prices have fallen around 8% from peak levels in late 2017, with Sydney down by around 12%. Aside from stretched valuations following earlier large gains and growing uncertainty regarding potential tax changes, domestic banks have become more cautious given increasing scrutiny on lending practices, resulting from a Royal Commission into misconduct within the financial services industry. On this front, we expect further price declines this year, although we don't see a full-blown collapse, as has been witnessed elsewhere.

Meanwhile, markets are poised for coming communication from the RBA over the next few days. We expect it to adopt a more cautious tone, noting the headwinds above and consequent rising risks. However the key for markets, as always, is to understand what is already “in the price”. Here we are wary that the RBA may not match the market’s dovish hopes, or the major dovish pivot just witnessed from the FOMC. We suspect the RBA will reduce near-term forecasts for growth and inflation, but continue to show core inflation just inside its 2-3% target band at the end of its forecasting horizon. This should allow it to retain a weak tightening bias, rather than a purely neutral bias. In turn, that could put Australian bonds under pressure, and provide a short term boost for AUD, particularly given our take on current global investor positioning. Things look set to heat up in the land down under.

To read more of Andrew Ticehurst’s views, click here.

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  • Andrew Ticehurst

    Rates Strategist, Australia

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