Underwhelmed households leave Reserve Bank adrift on key forecasts

Australia faces its most economically uncertain year for some time, with the Reserve Bank admitting that it is struggling to assess the overall direction of the economy amid weak domestic demand.

It’s all in the use of one word (“challenging”) in the RBA’s first Statement of Monetary Policy for 2019. Here, the bank says:

… sizeable revisions (in both directions) in recent national accounts have made it challenging to gauge underlying momentum in consumption growth. Recent declines in housing prices and housing market activity are also expected to weigh on consumption.

As the bank notes, consumption accounts for just over half of GDP. That means consumption is not merely the most important economic risk for the economy in 2019 but one where there’s great uncertainty.

This uncertainty reflects a series of revisions to key measures of consumption in the September National Accounts by the Australian Bureau of Statistics — revisions going back several years, which have cast considerable doubt on previous RBA estimates and thinking about consumption. That “has made it harder than usual to gauge the underlying momentum in consumption growth.” 

Part of this is down to weak household income. But “recent developments in housing markets have highlighted the additional risks that come from uncertainty about how households might change their consumption decisions in response.” As a result, the bank has revised its forecasts downward:

Consumption growth is now expected to be 2.75% over the forecast period, rather than 3% as had been expected for some time. This reassessment of the outlook for consumption is informed by the downward revision in the national accounts and, to some extent, the recent declines in housing market activity. The outlook for household consumption growth continues to be one of the key sources of uncertainty for the domestic growth forecasts, particularly given uncertainties around the outlook for income growth and how developments in housing markets will affect household decision-making.

That also reflect the bank’s official line that there’s nothing wrong with wages growth and if workers just wait a little longer — like, a seventh year — then wages growth will pick up “gradually” (that’s if they’re lucky enough to work in a sector like health where wages growth has had a 2 in front of it rather than a 1 for the last couple of years).

Factor in a federal election, an election in the largest state economy and a chaotic federal government, and the Australian economy faces its most uncertain period since the financial crisis — one that has left the central bank visibly at sea about which way to head.