Lack of cash rate ammunition to ‘constrain’ GDP growth

ANZ Research has released a new analysis in which it has forecasted Australia’s trend rate of GDP growth over the coming decade.

The research group has stated that it expects the annual rate of GDP growth to fall between 2-2.5 per cent, below estimates from both the Reserve Bank of Australia (RBA) and Treasury.  

This would continue the trend of falling annual rates of GDP growth over the past few decades, with the 1990s recording an average of 3.3 per cent, the 2000s recording an average of 3.1 per cent, and the 10 years to 2020 recording an average of 2.6 per cent.

According to ANZ Research, the slowdown is, in part, attributable to a drop in productivity growth, which could be “global in nature” but is also “endogenous” – caused by lower non-mining business investment.

“We think lower growth in non-mining business investment is likely related to a lack of demand,” the research group stated.

“Weaker productivity growth then feeds back to lower wage growth, which is the major contributor to weaker household consumption growth.”

Moreover, ANZ Research observed that the RBA’s recent easing cycle could undermine future attempts to stimulate household consumption.

“In the coming decade, growth in household consumption will face a structural constraint, on account of high household debt and the lack of room for the cash rate to be moved much lower,” the group added.

As a result, ANZ Research noted that the “structural downshift in demand” would reduce the likelihood of a rebound in non-mining investment growth,  which it said suggests that much of the domestic “drag” on productivity growth would remain in place “even if the global driver of the productivity slowdown reverses”.

“In our view, this suggests that trend growth in the coming decade will be lower than the last decade,” ANZ Research observed.

However, ANZ Research concluded by noting that if the primary cause of the slowdown is endogenous, there are potential policy options available to stimulate GDP growth, including renewed fiscal support to boost non-mining investment.

The analysis has come amid a revision to the global economic outlook from the International Monetary Fund (IMF).

The IMF has revised down its forecast for global GDP growth for 2019 to 2.9 per cent (down from 3 per cent), and its forecast for 2020 to 3 per cent (down from 3.1 per cent).  

“The downward revision primarily reflects negative surprises to economic activity in a few emerging market economies, notably India, which led to a reassessment of growth prospects over the next two years,” the IMF noted.

“In a few cases, this reassessment also reflects the impact of increased social unrest.”

However, the IMF expects downside risks to be offset by “tentative signs” of a “bottoming out” of manufacturing activity and trade activity, as well as a “broad-based shift towards accommodative monetary policy”, an easing of trade tensions, and “diminished fears” of a no-deal Brexit.

[Related: Treasury downgrades economic outlook]