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BILL’S BITES: The boom in a bind

08:32am September 20 2018

Westpac chief economist Bill Evans says economic conditions are not quite as strong as they sound.

I was very surprised to see that real gross domestic product expanded a solid 3.4 per cent in the year to June 30, well above market expectations for annual growth of around 2.8 per cent.

Much of the reason for the strong number – which showed the economy is running well above potential of around 2.75 per cent – comes down to upward revisions of around 0.5 percentage points of prior quarters, mainly around residential building activity and government spending.

And when you delve into the numbers, conditions are not quite as strong as they sound for consumers in particular.

For one, wages growth adjusted for inflation is running at around 0.3 per cent – people’s incomes are not reflecting the overall strength of the economy. The data, released earlier this month, also showed the household savings rate has fallen to just 1 per cent as people have to pullback how much they save to keep spending amid weak wages growth.

The pressures were borne out last week in The Westpac Melbourne Institute Index of Consumer Sentiment, which declined 3 per cent to 100.5 in September – the weakest sentiment read since November last year and only just above the 100 level indicating sentiment just remains in positive territory.

Increases in mortgage interest rates, political instability and household budget pressures are taking a toll.

So while we lifted our growth forecast for 2018 to 3.3 per cent following the strong GDP report, the profile of the economy remains one that will slow into 2019 to 2.7 per cent.

In contrast, the Reserve Bank appears increasingly comfortable with their forecasts that growth will remain above potential, as reiterated yesterday in minutes to its September board meeting.

But I’m more cautious around the implications of falling house prices, the associated negative wealth effect people feel, global economic risks, low wages growth and political uncertainty. Yesterday, the Westpac–Melbourne Institute Leading Index signaled a slowing in growth momentum as we move through the second half of 2018 and into 2019.

We continue to expect that the RBA will keep the overnight cash rate on hold at 1.5 per cent through to at least the end of 2020.

This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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