In its latest Asian Economics report for Q1 2018, HSBC Australia economists Paul Bloxham and Daniel Smith explain that Australia’s economy is growing solidly, with the latest national accounts showing that GDP growth accelerated to a slightly above-trend rate of 2.8 per cent year-on-year in Q3 2017.
“The main force at work has been that mining investment is stabilising, after having fallen significantly in recent years. At the same time, growth in the non-mining sectors has remained solid,” they said.
“As conditions in the mining industry improve and the local labour market tightens up, we expect a modest pick-up in wages growth, which should, in turn, see the RBA begin to normalise its current very stimulatory cash rate setting in 2018. Our central case is for the RBA to begin to lift its cash rate from mid-2018.”
However, one key risk to HSBC’s forecast is that wages could remain sluggish for longer than expected.
“This could occur if the effect of the cyclical lift in the economy and tightening of the labour market on wages growth and inflation are offset by the structural factors — such as offshoring, the changing nature of work and increased retail competition — to a greater degree than we are currently assuming,” the economists said.
HSBC believes that the cooling of the housing market could also be a larger drag on growth than expected. In particular, the bank noted that any pullback in Chinese household demand for Australian services would present a “considerable challenge” to its growth forecasts.
The latest CoreLogic Hedonic Home Value Index showed that national home values fell by 0.3 per cent in the month of December.
AMP Capital chief economist Shane Oliver noted that dwelling prices in Sydney have now fallen by 2.2 per cent from their July 2017 high, with houses seeing the bulk of the weakness in contrast to units.
“Prices in Sydney and Melbourne are expected to fall by around 5 per cent or so this year,” Mr Oliver said.
“Still low interest rates and support for first home buyers are providing some support and should help ensure only moderate price falls. A property crash is unlikely in the absence of much higher interest rates and/or unemployment — both of which are unlikely.”
Mr Oliver doesn’t see a rate hike from the RBA until the end of the year “at the earliest”.
[Related: Sydney drags down national home values]