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RB downgrades economic growth forecast

RB downgrades economic growth forecast

The Reserve Bank has downgraded its economic growth forecast to 2.75 per cent over both 2019 and 2020, after recently deciding to maintain interest rates.

  • Maja Garaca Djurdjevic
  • May 13, 2019
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The RB cut growth expectations on Friday to reflect the revised outlook for household consumption spending and dwelling activity. 

Forecasts for inflation have also been revised lower.

Trimmed mean inflation is expected to be around 1.75 per cent over 2019 and then increase gradually to 2 per cent in 2020 and a touch above 2 per cent by early 2021.

In the near term, CPI inflation is expected to run a little above the rate for trimmed mean inflation, driven by the recent increase in petrol prices, the RB said. 

The Reserve Bank issued some good news, reporting that although GDP growth has moderated, employment has continued to expand by enough to reduce spare capacity in the labour market over the past year. The unemployment rate is steady at around 5 per cent. 

The RB pointed out that housing prices have continued to decline in the largest cities, although revealing that the pace of decline has eased a bit recently. Prices have also been declining in many other cities and regional areas. Other than in Sydney, rental vacancy rates generally remain below average levels.

The RB admitted that weak growth in household income poses a key risk to the outlook for household consumption, especially in the context of falling housing prices and the need for many households to service high levels of debt. 

The Reserve Bank board has maintained the cash rate at 1.5 per cent since August 2016. This expansionary setting of monetary policy is believed to have helped support growth and create the conditions for the decline in the unemployment rate that occurred over 2018. 

Following its recent meeting, the RB said that the board focused on the implications of the low inflation outcomes for the economic outlook. It concluded that the ongoing subdued rate of inflation suggests that a lower rate of unemployment is achievable while also having inflation consistent with the target.

 

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