Bank expects the RBA to begin an easing cycle in Q3
The economy’s significant slowdown is evident from the sequential decrease in quarterly GDP growth throughout 2023, ending with a mere 0.2% increase in the last quarter, the Commonwealth Bank of Australia (CBA) has said.
“The recent run of quarterly changes in real GDP paints the picture of an economy that has slowed significantly,” said Gareth Aird (pictured), CBA head of Australian economics. “The quarterly changes over 2023 now read 0.6%, 0.5%, 0.3%, and 0.2%.
“The six-month annualised pace of GDP growth to the December quarter fell to 1.0%. This compares with population growth of ~2.5% per year. The upshot is that the economy has gone backwards a lot in per capita terms over the second half of 2023.”
According to Aird, the Reserve Bank of Australia’s (RBA) aggressive interest rate hikes have successfully tempered demand growth, impacting households through higher mortgage payments, increased taxes, and the effects of rising inflation. This has severely restricted growth in real consumer spending, which has barely increased over the past year.
“The weakness in the consumer lies at the heart of the soft GDP outcomes,” he said. “And it is the primary reason why the unemployment rate is on a firm upward trend, albeit from an incredibly low level.”
Aird noted a decline in investment in dwellings, with a significant drop in both new constructions and renovations, while business investment has emerged as a positive contributor to the economy. Private investment increased by 0.7% in the quarter, highlighting robust growth in non-residential and engineering construction, as well as machinery and equipment investment.
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Despite these challenges, household disposable income saw a 2.3% increase in the December quarter, driven by a rise in employee compensation and a decrease in income tax payable.
However, Aird said the overall economic picture remains weak, with real household disposable income showing a decline over the past year, contributing to low consumer sentiment.
The nominal GDP grew by 1.4% in the fourth quarter of 2023, with the terms of trade improving by 2.3% during the same period. But savings rates remains low compared to pre-pandemic averages, and productivity has seen some improvement despite a decline in hours worked.
Aird’s analysis suggests that the RBA’s forecasts may have been too optimistic, particularly regarding household consumption. With economic growth expected to remain below trend and the unemployment rate predicted to rise, it’s anticipated that this will ease wage pressures and continue the trend of disinflation.
Aird said the CBA expects the RBA to begin an easing cycle in the third quarter of 2024, with a series of rate cuts aimed at stabilising the unemployment rate.
“We remain comfortable with our base case for an easing cycle to commence in Q3 2024 – we have pencilled in September,” he said. “We expect a string of rate cuts once the RBA eases policy to prevent the unemployment rate from rising to ~5%.
“We have 75bp of easing in our profile by end-2024 and a further 75bp of cuts in H1 2025 that would take the cash rate to 2.85% – a level we assess to be roughly neutral.”
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