It’s early days, to be sure, but 2015 has not kicked off well for the Australian economy.
Commodity prices are cascading lower, retail spending is subdued, the government remains hell-bent on cutting spending / increasing charges which is not good news for household consumption spending, global bond yields have fallen to levels never before seen and the Australian dollar has remained firm after the free-fall of 2014.
The problems in the economy have shown up in market pricing for interest rates where rate cuts are now seen likely. Two 25 basis point cuts are priced in as investors try to anticipate a policy response to these escalating problems for Australia.
House prices growth is slowing, which will be a mixed blessing – it is good news as it helps to correct imbalances that were so evident in the Sydney market in particular, but with immigration slowing and new construction booming, it would be no surprise if we start hearing about ‘an apartment glut’ and price discounting through the course of 2015, which may not be good news for sentiment.
Economic forecasting is mainly about the balance of risks. Those risks are inexorably skewed towards weakness in growth, higher unemployment, very low inflation and because of that further falls in the Aussie dollar and the RBA moving the cash rate from the current 2.5 per cent towards 1.5 per cent through 2015.
Indeed, it looks like the RBA fluffed things in 2014 by not hiking early in the year to hit house prices and then cut as the terms of trade and mining investment slump unfolded. It can make amends with rate cuts in 2015, starting in a few weeks time with a 25 basis point cut at its February meeting.
For the budget, on-going weak growth is poison for tax receipts and when Treasurer Hockey hands down the 2015-16 Budget in May, it seems close to certain that the budget deficits will be larger and the return to surplus will be even later than he is currently forecasting.