Jarrod Kerr
Jarrod Kerr
economy economy-and-economics employment forward interest likely rate rates rising weaker
Employment is likely to be much weaker going forward and the jobless rate will keep rising as the economy cools. Interest rates are on hold.
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The prolonged sluggish performance in exports is unwelcome because exports are another area of the economy that needs to improve, given the slowdown in the domestic economy.
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The much-needed rotation in the sources of Australia's economic growth away from consumer spending and home building is well under way.
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Recent soft economic numbers for Australia and the fall in the annual rate of inflation add up to an unchanged cash rate on Wednesday. In fact, we forecast an unchanged rate for all of 2006.
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The downside surprise on economic growth was not large enough to alter the outlook significantly.
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The probability of rate cuts this year is very high and we see 100 basis points of easing starting in July or September.
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We don't think there is anything to warrant a rate move from the central bank. Even though building approvals rose in November, housing is still in correction mode.
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These reports provide further reasons for interest rates to remain on hold.
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Corporate spending, particularly in mining, has replaced household spending and home building as the principal driver of growth in the economy. It will also alleviate capacity constraints in the economy.
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There's no need for the central bank to raise interest rates again.
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We've been expecting exports to pick up some of the slack of the easing domestic demand and we're not seeing this to date. So clearly there are capacity constraints out there that remain.
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Growth in employment this year is likely to be substantially lower than over the past year. In that sort of environment, we forecast the central bank will leave interest rates unchanged for the rest of the year.
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Business credit growth had been quite weak for the last few months, so a good strong rebound in business borrowings is a positive for capital expenditure, which is needed in Australia.
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The good news is the surge in business investment is laying the groundwork for improved growth. This is what the central bank wants and so they will stay on the sidelines.