BT Investment Management’s Vimal Gor has featured in YieldReport on several occasions. Back in March Mr Gor predicted Australian cash rates would fall to 1.50% due to global economic weakness, a slow transition away from mining investment and a desire by the RBA to lower the Australian dollar against other currencies. In the month which has passed, the RBA has cut rates to 1.75% and markets are factoring in another cut to 1.50%, all on the back of surprisingly weak March CPI figures.
His latest forecast goes significantly further. While he acknowledges employment and growth figures are strong, he says these figures mask some underlying weaknesses in the employment market and domestic demand for goods and services. He believes these weaknesses are a prelude to “more weakness in the future and a whole lot more cuts from the RBA.”
He is expecting several factors to play a part in his outlook for Australia’s economy. Firstly, Australia’s export growth will falter as China cuts steel production. Mining investment will continue to fall away from the boom-time levels Australia experienced at the start of this decade. Housing investment, which had been offsetting falling mining investment, will be curtailed as a glut of apartments hits the market. “This takes us to roughly 1.5%-2.0% GDP growth per year after taking away unsustainable sources. This remains a far more realistic target for Australia with domestic demand growth tracking at about 1.0%.”
Last month’s employment figures indicated part-time jobs were increasing at the expense of full time jobs. Mr Gor thinks they are probably lower paying jobs, especially given recent weak wages growth numbers. “This is reflected in the very weak wage growth numbers which continue to trend downwards… either way, consumption is likely to weaken further from here.”
Mr Gor expects the RBA, as one of the few central banks not already at zero rates, will cut further than markets are expecting in order to push against deflationary conditions. “So the RBA still has scope to ease to help inflation recover and it’s quite clear to us that the RBA will be easing to 1%, with a move to 0% or lower a distinct possibility.”
However, in doing so the RBA will join the European Central Bank (ECB) and the Bank of Japan (BoJ) whose “absolutely useless“ programmes will leave them with few, if any, monetary policy “bullets” with which to fire. “This could mean that the much talked about currency wars are over…run out of bullets and you don’t have much of a war.”