Where to for rates?

Where to for rates?

Apr 06, 2019 admin Australian economy, Fixed Income, news, SMSF 0 Comment

The Australian economy’s 27 years of unbroken economic growth has slowed as evidenced by GDP data released in March.

It showed growth of 2.3% for 2018, well below the 2.75% RBA forecast. When you remove the population growth from the data, we have had 2 negative quarters of economic growth – which is a ‘per capita’ recession. Ie, the economy only grew because of migration or babies being born.

Elections – the looming election and significant changes in policy of the 2 parties have put business spending on hold. Both are promising big spending, which will ultimately be positive for the economy, but global growth is also at a precarious point, so the Australian economy’s main powerhouse (commodities) are also at risk.

Looking forward, what are the signals for the Australian economy? Consumption, or what we eat, buy, and use represents around 55% of the Australian economy. Drivers for how much we spend relate to our income and cost of living. Looking at these;

  • wages are reasonably stagnant, and while unemployment is a very low 5%, people are underemployed, and would like to work more (see chart 1 below).
  • cost of living is rising (see the chart of mortgage rates vs RBA cash rate & how the gap is widening),
  • house prices continue to deteriorate (chart 2 below), making consumers feel poor, or start to save.

Australian mortgage rate vs rba

Chart 1

Australian House Prices

Chart 2

The RBA believe household income will continue to dictate the pace of consumption growth, so this needs to be watched closely.

In the end, if the RBA cuts interest rates (highly likely), it doesn't necessarily mean the banks will be passing the savings to mums and dads, and that they will lift spending.

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