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GDP growth projections to fall short, says NAB economist

GDP growth expectations are “optimistic” amid continued weakness in the housing market and lower than expected wage growth, according to a NAB economist.

In his analysis of the Coalition government’s 2019-20 budget, NAB chief economist, markets, Ivan Colhoun, said he expects the government to fall short of its “optimistic” GDP growth target of 2.75 per cent.

“When we look at these forecasts, I think most people will probably say there’s a risk their GDP forecasts are a bit strong for 2019-20,” Mr Colhoun said at NAB’s annual budget breakfast.  

Mr Colhoun pointed to the weakness in the Australian housing market, with the government projecting a cumulative fall in dwelling investment of 11 per cent over the next two years.

“That is certainly one of the sectors that is going to be weak in the Australian economy,” he said.

The NAB economist also noted concerns over the impact that falling property prices could have on consumer spending (wealth effect).

“We know the [Reserve Bank of Australia] is monitoring that fall in housing construction,” Mr Colhoun continued.

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“They’re also worried about whether consumers will cut back their spending because of falls in house prices that have been occurring. Those are challenges for growth.” 

The chairman of Property Council of Australia, Ken Morrison, agreed, describing developments in the housing market as the government’s “economic wildcard”.  

“This is a budget set for growth, but behind every number in the budget is the unknown effect of the housing downturn,” Mr Morrison said.

“The headlines of surplus, infrastructure and tax relief are welcome, but falling house prices are clearly Treasury’s economic wildcard.

“The government and the Parliament must have a laser-like focus on the housing sector and be ready with a contingency plan if these forecasts aren’t met.”

In his address, Mr Colhoun also claimed that the government’s forecasted wage growth of 2.75 per cent over the 2019-2020 financial year are “optimistic”.

The economist predicted that weaker than expected growth forecasts would prompt the RBA to cut the official cash rate twice before the end of the 2019, adding that a May adjustment could be possible.

The sentiments raised at the NAB budget breakfast were echoed by Shane Oliver, AMP Capital’s head of investment strategy and chief economist, who has said that he thought the government’s growth forecasts “look a little bit on the optimistic side, particularly the assumptions for wages growth,” but noted that the budget still shows a record run of 11 years of budget deficits.

However, he noted that this had been achieved largely by “a combination of ramping up spending at the time of the GFC and then not reining it in again,” adding: “Unlike prior to the GFC, we have nothing put aside for a rainy day, and there is a risk that the revenue surprise will prove temporary if global growth slows or, more likely, Australian growth and employment disappoints.”

CoreLogic’s head of research, Tim Lawless, also cast doubt over the reliability of the government’s wage growth projections. 

“Based on these forecasts, and their potential to undershoot as they have over previous years, we can’t rely on a material improvement in household incomes to boost spending and stave off a higher rate of saving,” he said.

However, Mr Lawless said that the government’s income tax changes could help stimulate household consumption. 

“On the positive side, household income and consumption should find some support from personal income tax cuts for low to middle-income workers (those earning $126,000 or less) and cost of living relief to pensioners,” he said. 

“With income growth slow, additional cash in people’s pockets each week is positive and could be moderately stimulatory from a consumer expenditure perspective.  For example, those that earn between $48,001 and $90,000 will gain an additional $1,080 over a year.”

[Related: Dwelling investment to detract from growth, says government]

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