NAB Economists Shift View On Rates

By Glenn Dyer | More Articles by Glenn Dyer

Despite a small improvement in business conditions in January after December’s sharp fall and a small improvement in business confidence, the National Australia Bank has had significant change of heart and is now forecasting that the Reserve Bank will leave rates on hold for a long time – well into next decade – but with a rate cut not out of the question.

The NAB’s chief economist, Alan Oster said in a statement with yesterday’s release of its January business survey that with inflation remaining weak and households facing a range of headwinds including modest wages growth, the RBA may have to slice the official cash rate from 1.5%.

“While our central case is for the cash rate to remain on hold, based on the balance of risks the next move could well be down, potentially as soon as the second half 2019,” he said.

“With inflation remaining weak and growth weaker than the RBA expected, the risk is that the bank will act to bolster the economy should the labour market show any signs of deterioration or consumer spending weaken further,” Dr. Oster said in yesterday’s statement.

The NAB joins the like of Westpac, the AMP’s Dr. Shane Oliver and a rising number of private economists who reckon rates will remain steady or fall – not rise.

The change of heart has been especially noticeable since the central bank and government Phil Lowe changed their stances on rates by moving to one where a rate cut is now very much an option.

The Commonwealth now reckons rates will be steady until the middle of 2020; Westpac does not believe there will be any change this year or next while the ANZ still believes in two rate rises in 2020.

That too was a significant switch in stance as the RBA had been saying more months that the next rate rise, whenever it happens would be up.

In contrast, the AMP’s Dr. Shane Oliver has been tipping a rate cut in late 2019 since midway through 2018 and last week added an extra rate cut by the end of this year with the RBA moving the cash rate to 1% from the current 1.5%.

While the NAB survey saw a “moderate rebound in January” in business conditions, one point did stand out – a big fall in capacity utilisation, which is a part of the NAB survey that the RBA watches closely.

“Of interest, this month is a significant fall in capacity utilisation to levels only just above average. This may have implications for both future employment and CapEx plans,’ NAB economists noted.

“Capex and capacity utilisation declined in the month. The fall in capacity utilisation was large and is now only just above average levels – with most industries actually below average levels.”

The NAB said that the survey showed business conditions rose by 4 pts to +7 index points in July, driven by an increase in trading (now +10), profitability (+5) and employment (+5). Confidence rose 1pt in the month to +4 but remains below average.

The unusually sharp moves in conditions in South Australia and transport & utilities unwound somewhat in January. There was no rebound in NSW and Victoria – while SA and WA continue to lag.

“While the aggregate rebounded in January, retail business conditions remain weak. This follows on from the recently released official retail sales data that showed a decline in December and only small rise in volumes for the quarter as a whole.

“Car sales and household goods continue to show the weakest and falling conditions in our survey – this is consistent with the broader macro story at present,” said Mr. Oster.

In trend terms, the NAB said conditions remain strongest in the eastern mainland states – albeit there was no change in conditions in NSW and Victoria – with SA and WA lagging somewhat. Confidence is generally higher in SA and WA suggesting business’ outlook is better than recent experience.

“Confidence is weakest in the east, with VIC and NSW now quite low,” Mr. Oster said.

“The business sector is an important part of our economic outlook. For now, we expect business investment to still provide support to the economy over the next few years with a bit of extra support from infrastructure spill-overs and possibly even some new mining investment.

“The business survey is consistent with ongoing growth in the sector. However, we remain cautious, and will be looking for the next reading to see whether there is any further deterioration” Mr. Oster said.

“Based on the confirmation that conditions have deteriorated further and our current set of forecasts we now see the RBA staying in neutral for the foreseeable future, though think the next move could be down rather than up based on the current trajectory of growth and growing downside risks,” said Mr. Oster.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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