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GDP outlook propelled by rate stimulus

Without interest rate cuts and tax deductions, the outlook for GDP growth would have been “materially lower”, according to ANZ Research.

ANZ Research has revised its forecasts for GDP growth over the coming quarters, forecasting growth of approximately 2.4 per cent through 2019, which it then expects to lift into the “high 2s” by the end 2020.

According to ANZ senior economist Felicity Emmett, a “key driver” of the anticipated “pick-up” in the domestic economy would be the fiscal and monetary policies employed in the first half of 2019, which included the Reserve Bank of Australia’s (RBA) back-to-back reductions in June and July, and the federal government’s tax deductions.

“Without this stimulus, growth would have been materially lower,” Ms Emmett said.

The economist said that “public spending and exports” would be the main drivers of the pick-up in GDP growth, with the improvement to be offset by “lacklustre” business investment, weakness in the labour market, subdued construction activity, and “considerable” risks in the global and domestic economy.

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“On the international front, the key risk is that an escalation of trade tensions sees a further deterioration in the outlook,” she said.

“Domestically, our main concern is the consumer: the impact of the tax cuts and the ability of households to grow spending in an environment where income growth is soft and the debt burden remains high.”

As a result of such downside risk, analysts are expecting the cash rate to hit 0.5 per cent by the end of 2019, with the potential for further cuts in the first half of 2020.

ANZ Research’s head of economics, David Plank, previously said he expects rate cuts in 2020 to drag the cash rate down to the effective lower bound of 0.25 per cent.

Mr Plank said that the need to stimulate an underperforming labour market would outweigh risks associated with a sharper than expected recovery in the property market.

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“There are a lot of moving parts for the RBA to consider at present, ranging from a deterioration in the global backdrop to the risk that even lower interest rates will turn a recovery in house prices into a boom,” he said.

“We think the RBA will judge that it has little choice but to ease further over the coming year, as the impact of the sharp domestic slowdown feeds into the labour market and the bank is forced to respond to global policy settings.”

[Related: Cash rate to hit lower bound by May]

GDP outlook propelled by rate stimulus
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