Australia | Jun 25 2009
By Chris Shaw
The economics team at Westpac has re-run its numbers on the Australian economy, the biggest change coming to its outlook for employment in the months ahead in that it now expects the point at which unemployment will stop rising will now come much earlier in 2010 than it had previously expected.
As chief economist Bill Evans notes, this is because the bank’s leading indicators for such measures have bottomed out earlier than was thought likely, so to reflect this Evans has lowered his peak unemployment estimate to 8.1% from 8.6% previously.
Leading to this peak Evans expects unemployment will increase the most in the second half of 2009 and as this is occuring it is likely to see a reaction from the Reserve Bank of Australia (RBA), meaning further cuts to official interest rates, a move it will be able to make given it resisted further cuts earlier this year.
On Evans’s numbers two further cuts of 0.25% each are most likely, with the cuts expected to be spaced a couple of months apart. This implies a bottom in the rate cycle of 2.5% with respect to the official cash rate, which is higher than Evans’s previous forecast of 2.0%.
Given unemployment will bottom out faster than he had previously thought Evans accepts there is an increased risk of a rate hike cycle also emerging faster than was expected but in his view this is balanced by still modest growth assumptions for next year, when GDP in Australia is forecast to rise by just 1.0%.
At the same time unemployment is expected to remain close to 8.0% for much of next year, while business investment should also be continuing to contract, which means inflation is unlikely to emerge as a problem anytime soon. Also, while housing has been strong the outlook remains mixed given first home buyers have been driving the sector and these may pull back as grants are phased out from the end of September.
A bigger problem for policymakers according to Evans is the business sector as the contraction in investment is coming at the same time as excess capacity is increasing, reflecting the view consumer spending will slow further in the next six months as the impact of the fiscal stimulus package fades.
It is concerns over these drivers of the economy that Evans suggests will see the RBA move further on rates, as the expected direction of data suggests some concerns over the tractability of Australia’s economic recovery.