Reserve Bank leaves interest rates on hold at 1.5%

The Reserve Bank board once again kept the cash rate unchanged at 1.5%. But a slowing economy means it’s likely the RBA will cut the cash rate this year, with a growing possibility of two 25 basis point cuts.

Unemployment is low, but it’s likely the jobs market will worsen in the year ahead

The RBA will place focus on the low unemployment rate, which fell to 4.9% in February, the lowest since 2011. The under-employment rate, which measures the share of people working part-time who would like more hours, has also fallen over the past year from 8.5% to 8.1%.

The RBA stated that the “labour market remains strong”, but removed the sentence, “[a] further decline in the unemployment rate to 4¾ per cent is expected”. This suggests the RBA will raise its unemployment rate forecast in May.

Rising job vacancies point to continued low unemployment - as the demand for workers indicates future movements in the unemployment rate.

Job vacancies throughout Australia increased to 245,000 in February 2018, from 186,000 in February 2017.

Between November 2018 and January 2019, the job vacancy rate fell slightly from 1.43% to 1.39%.

Job Vacancies_ Source:

Economic growth slowed in 2018 and will remain sluggish in 2019

Economic growth slowed dramatically in the second half of 2018, and most indicators suggest weak growth will continue into 2019.

Real Gross Domestic Product grew by 2.3% in 2018, below RBA predictions of 2.75%. Growth slowed in the latter part of 2018: in six-month annualised terms, real GDP growth slowed to 0.9% in the December quarter.

Economic Growth and GDP

Housing construction is likely to contract over the next couple of years

Housing construction slowdown is a looming risk to Australia’s economy.

While house building is currently at a high level, it is likely to drop off significantly and create a risk of slower economic growth and higher unemployment in the building industry.

The RBA has also highlighted that apartment construction in Sydney and Brisbane will decline substantially over the next couple of years.

Building Approvals _Source:

Despite a softening economy, the RBA has remained relatively optimistic. But when the central bank releases its new forecasts in early May this tune may change to a more pessimistic outlook.