© Jonathan Cavenagh
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Looking from an aggregate economic perspective it is difficult to measure. Obviously, what happens with the Australian consumer overall is extremely significant for the economic growth. Consumption is around 65%-70% of Australian GDP, which is going to be a very important driver for the economic growth, as it has been during the recent year. I think that the government currently has got a fairly aggressive form of agenda in order to try and bring the budget back into balance. However, our view is that the impact on the economy is not going to be filled in a meaningful way until around 2016-2017. Hence, the government will be a drag on activity in Australia, but it is more likely to be an issue in the upcoming few years, rather than at the current moment.
The latest Westpac-Melbourne Institute Leading Index rose in May, however, according to economists, it remains low enough to signal a below-trend rate of growth later in 2014 and into 2015. Do you agree with the statement, and will it be possible to witness the RBA cutting rates in the foreseeable future, in case there will be no improvement in the economy?
I agree with the Leading Index figure and that is certainly what other indicators in the economy are also saying at the moment. Thus, the economy is growing below trend and there are number of reasons for that. Obviously, we have a fairly big drag from the mining investment situation, which continues to slow. That has been expected for quite a long period of time, but the critical issue is what is happening with the non-mining part of the economy.
From that perspective we have seen some positive signs since the beginning of 2014, when housing and consumer spending started to come back. However, during the recent months there is a bigger question mark around whether or not that part of the economy is going to be strong enough to offset the weakness that we see in the mining investment slowdown. Hence, some of the housing market indicators had come off, the Leading Index dropped, and our own Westpac consumer sentiment survey has also fallen quite noticeably.
There is a risk that economy does grow below-trend and, if that sustains for a number of months, there is a high possibility that the unemployment rate could actually trend back up. In that case the Reserve Bank of Australia may feel compelled to whack. The RBA does not have any easing bias at the moment, but their recent commentary has hinted more uncertainty surrounding the outlook. Thereby, we forecast that the interest rate will remain on hold over the next six months. However, if there was to be a move on the interest rate front, it is more likely to be a catch rather than a hike over the next six months.