RBA cuts Australia GDP forecasts; IMF says policy needs to stay accommodative

The growth forecast for the year to June 30 was cut by 1% to 1.5-2.5% and the 2018 growth to 2.75%-3.75%, down 0.25 %, from the November forecast.

Reserve Bank Of Australia Reuters

The Reserve Bank of Australia has cut its economic growth forecasts on Friday (Feb 10) citing the contraction in September and weaker household spending while the International Monetary Fund in a regular review that the bank has to keep policy accommodative to support growth.

The Australian dollar was little changed near 0.7634/USD amid a broadly strong US dollar and rallying stocks globally after the record high closing of US share indices on Thursday.

The RBA said in its quarterly statement on monetary policy that it sees a GDP growth of 1.5 to 2.5% in the year to June 30, down by 1% from the forecasts published in November.

The central bank said a return to above-trend growth by the end of 2017 may be possible but it still went ahead and cut its forecast for the next year to between 2.75% and 3.75%, down 0.25 % from the previous forecast.

The Australian economy had contracted 0.5% in the September quarter, the first dip in more than 5-1/2 years, dragged by falling investments and net trade, as per the data released on 7 December.

Gross fixed capital formation dropped by 2.7% in the September quarter subtracting 0.7 percentage points from growth. Private investment fell 0.8%.

Household spending accounts for 60% of Australian GDP and a downbeat outlook for the same has had impact on the latest forecasts.

"Subdued growth in household income is likely to continue to constrain consumption growth over the period ahead," the RBA said on Friday.

"The forecast for consumption growth has been scaled back a little to reflect recent data and a view that consumption is unlikely to grow materially faster than income over the next couple of years."

Tax cuts, Trump

Reserve Bank of Australia governor has backed further company tax cuts in the country. Philip Lowe said it is needed to make sure that the tax system is "internationally competitive", in the background of likely policy changes in the US that could inflation in the world's largest economy which can then spill over to its trade partners.

Lowe said Trump's protectionist trade policies are also likely to weaken global growth. "There is a rising risk that more restrictive and protectionist trade and immigration policies under a new administration could harm global growth prospects," the RBA said.

The 2016 year GDP numbers for Australia will be released on March 1.

IMF Report

International Monetary Fund in its Article - IV review released on Friday said the RBA has to keep interest rates "accommodative" and to be prepared to ease further, if warranted.

The Fund aid Australia had not been able to completely escape elements of the "new mediocre" and continued support was needed "to ensure a smooth transition to non-mining growth".

"Wage and price pressures have been weak, underemployment has risen, and private business investment outside mining has been lacklustre," the IMF paper said.

The IMF said the Australian government's budget targets had not been met because of weaker than expected growth in incomes. Its revised targets depended strongly on higher income tax collections as a result of bracket creep.

"Many directors saw scope for using the available fiscal space to support aggregate demand and structural fiscal reforms, as well as increased infrastructure investment," the statement said

Meanwhile, Treasurer Scott Morrison said the IMF report highlighted the need to press ahead with reforms that would boost productivity.

"It highlights the need to press ahead with reforms that will boost productivity, which is essential for growth in living standards," Morrison said.