Warren Hogan, ANZ’s chief economist, now expects the RBA to cut rates next year and not just once, but twice. Since the last 25bps cut in May this year, he has maintained the view the RBA has been leaning towards a rate cut but that “lean” is now more a definite expectation. It is worth noting Mr Hogan correctly predicted in January this year the RBA would cut the cash rate twice in the first half of 2015.
The firming of opinion has been put down to the view that Australian economic growth will not be high enough to reduce the spare capacity present in the economy. There are two factors why it won’t be high enough: lack of global growth and a softening Australian non-mining sector.
Global growth and more specifically, growth among Australia’s trading partners such as China and Japan, is slowing and expected to slow further. Volumes of exports are under pressure and the prices paid for those exports, such as coal and iron ore, have come down dramatically. Prices of imports may also be weaker but not to the same degree and thus Australia’s terms of trade will have weakened, effectively reducing Australia’s export income.
The non-mining sector has been supported by construction in the housing market and the fall in the exchange rate. ANZ expects housing construction to pull back from its recent strength while the exchange rate is expected to settle after having fallen substantially through the first three quarters of 2015. The net effect is a non-mining sector which is travelling at trend with “little prospect of improving”, while mining investment is expected to fall further.
Under the above scenario, Mr Hogan says “it is difficult is difficult to see how inroads can be made into an elevated unemployment rate” and his view is that the risk of higher unemployment is therefore greater. Hence the bank’s view of pressure on the RBA to cut rates.
There are two caveats to ANZs reasoning: a massive stimulus package out of China and/or the domestic economy staying stronger for longer. ANZ expects the domestic figures to remain strong this year but it’s not this year featuring in ANZ’s calculations, “it’s next year where we see things softening.”