Think Big: Is the RBA being a little ‘too optimistic’ in its latest growth forecasts?
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The latest RBA forecasts went public this morning when the bank released its quarterly Statement on Monetary Policy (SoMP).
Analysts often turn straight to the Economic Outlook section, where the bank provides its latest set of economic forecasts for the next 2.5 years.
And in its appraisal of the latest SoMP (released this morning), CBA’s economics team reckons the RBA is being a little “too optimistic” on the near-term outlook.
“We broadly share the RBA’s optimism about the economy over the medium term,” CBA said.
“But we are more concerned about the economy over the near term and think that it will take a while to regain economic momentum again once lockdowns are over.”
Of interest to the CBA team was the RBA’s 2021 GDP projections, which suggest the economy will still expand in the second half of this year (by 1.4%).
With most of Australia’s east coast in lockdown, that implies a small 1% dip in the September quarter before a Q4 rebound.
That outlook is “vastly different” to CBA’s forecast, which is for a much sharper 2.7% slump in Q3 and a smaller pickup into the end of the year.
When it comes to ‘rona outbreaks and extended lockdowns, the ASX has so far demonstrated a strong capacity to be forward looking.
Markets cruised through July as Sydney’s outbreaks went from bad to worse. And whether its stocks or the economy, both CBA and the RBA (and evidently stock investors) can agree on one point; that “the domestic and international experience to date is that economic activity can recover quickly once restrictions are lifted”.
In that context, another highlight of the SoMP is centres around the RBA’s latest forecasts for inflation — the primary catalyst for changes in interest rates.
While the RBA has taken a comparatively cruisy view towards the economic impact of lockdowns, its medium-term views around inflation hasn’t changed much.
It still forecasts trimmed mean inflation to hold below 2% through 2022, before edging higher to 2.25% by year-end 2023.
That’s not enough to shift the bank’s current forecast for rate hikes, which governor Philip Lowe reiterated in a statement to parliament this morning.
Under the RBA’s “central scenario, the condition we have set for an increase in the cash rate is not expected to be met before 2024”, Lowe said.
So that remains the baseline assumption upon which Australian equity valuations are based on.
Still, don’t rule out the prospect of another economic snapback.
“Once a large share of the population is vaccinated, the economy will have clear air from the virus,” CBA said.
“And it will mean an incredibly good year for the Australian economy in 2022 — provided policy support remains significant.”