The National Australia Bank sees stronger economic growth and no need for rate cuts in the middle of 2017.
The bank revealed yesterday that it had dropped its previous forecasts for two rate cuts from the Reserve Bank in the wake of stronger economic data in recent weeks, especially the bank’s own business survey for January which revealed an acceleration in the improvement of business conditions and confident in January from the small rise seen in December.
And included in the outlook was a very bullish upgrade to its 4th quarter GDP growth estimate of 0.9% (after the 0.5% contraction in the September quarter).
The rising local stock market (ignoring the so-called Trump effect) is reacting to the flow of better news, especially from resource companies such as oil and gas producers, iron ore miners and copper and gold companies.
In its December survey saw the NAB maintain forecasts for “Two more 25bps rate cuts are still expected from the RBA this (financial) year in response to on-going low inflation and a more subdued growth outlook.”
Now the NAB says it sees just one cut this year.
“We now expect a 25 basis point cut to the RBA’s cash rate in November 2017 to 1.25 per cent – necessary to help prevent the unemployment rate from rising and underlying inflation from undershooting the bottom of the target in 2018,” the bank said in its new forecasts issued yesterday.
The bank said on Tuesday that it was updating its forecasts and would release them yesterday, which it did.
The NAB said that "business conditions have turned up in December and January, suggesting the soft patch through much of H2 2016 was a ‘mid-cycle’ loss of momentum as we had suspected.”
The NAB expects quarterly growth outcomes to be solid in 2017, with the drag from mining investment easing, LNG exports adding strongly to growth and the global backdrop somewhat more supportive.
That is in line with what the Reserve Bank has been saying about the economy since its meeting last week, that speech from Governor Phil Lowe a week ago today (Thursday) and the first Statement on Monetary Policy for the year last Friday.
The bank’s economists are expecting the annual growth rate to pick up to over 3% by the third quarter of this year, but added that the annual average pace of growth for 2017 will be a lowly 2.3%. The bank said the “pick up in momentum will keep the RBA on the sidelines through much of 2017” and for that reason the NAB says it no longer sees the need for rate cuts around mid year.
But while the backdrop has turned more favourable for the economy in 2017, NAB remains concerned about next year, as the contribution from residential construction, LNG exports and temporarily higher commodity prices fade and household consumption remains constrained. Hence the rate cut forecast for late this year.
"Employment growth slowed sharply in H2 2016, particularly in NSW according to the official data. Leading indicators of the labour market such as the employment index of the NAB business survey and job advertisements point to strengthening employment growth over the first half of 2017, although it is unclear whether this will be accompanied by lower unemployment given additions to labour supply.”
The NAB says it sees unemployment remaining around 5.75%.
