The Reserve Bank of Australia has slashed its forecast for the country’s growth amid weak consumption, global trade tension and a worsening outlook for the Chinese economy.
The central bank said in its monetary policy statement on Friday that it had lowered its forecast for gross domestic product growth for the year to the end of June from 3.25 per cent to 2.5 per cent.
The RBA warned that a correction in the property market, which has seen national house prices fall 8 per cent from their 2017 peak, is “a significant area of uncertainty”.
It revised its consumption growth forecast down from 3 per cent to 2.75 per cent over the coming year. The announcement saw the Australian dollar slide as much as 0.5 per cent to $0.706 against the dollar, its lowest since early January.
The central bank noted that growth among Australia’s major trading partners slowed more than expected in the second half of 2018, with trade tension involving the US remaining a downside risk.
“The outlook for the global economy has become more uncertain, partly because it is hard to predict how trade policies might evolve and how much support stimulatory policies will provide to domestic demand, especially in China,” it said.
In China a range of indicators “suggest a more pronounced slowing in momentum”, the bank said. “Some of the slowing stems from efforts to rein in shadow financing as well as the effects of recent tariff increases on bilateral trade with the United States,” it said.
The RBA has held its cash rate steady at 1.5 per cent since August 2016. But on Wednesday, Philip Lowe, the bank’s governor, held out the prospect that the next move in its key interest rate could be lower as risks from the global economy increased and the domestic housing market slowed.
Ben Udy, an economist at Capital Economics, said the RBA’s move to a neutral guidance was a step in the right direction but he predicted future rate cuts. “We suspect that the economic deterioration this year will cause the bank to become even more dovish and eventually cut rates to 1.0 per cent by early 2020,” he said.
Australia faces the twin challenges of a slow down in global growth, including in its biggest trade partner China, and rapidly falling house prices in its biggest cities, Sydney and Melbourne. National house prices surged by 50 per cent in the five years to 2017 but tighter credit conditions and concerns over household debt are causing a correction that economists warn is denting consumption growth.
“The outlook for consumption growth hinges on household income growth picking up, and by enough to offset households responding to falling housing prices by reining in their spending,” said the RBA.
The central bank warned dwelling investment could tail off sooner and faster than previously expected, noting sharp falls in building approvals. Financial conditions had tightened for developers over the past six months, with some obtaining finance from alternative sources, at higher rates of interest, said the RBA.
Economic growth fell unexpectedly to 2.8 per cent in the year to end September, down from 3.4 per cent recorded three months earlier. The RBA forecasts growth will be 2.75 per cent in the year to end June 2020, compared to its earlier forecast of 3.25 per cent.