Economic recovery ‘stalling’: Westpac says rate cut is a lifeline for households

A Westpac survey of future growth prospects suggests the Reserve Bank’s interest rate cut Tuesday will be much needed.

The Westpac-Melbourne Leading Index, which forecasts the likely pace of economic activity three to nine months in the future, saw a dive in sentiment, dropping to 0.2 per cent from 0.5 per cent in March.

According to the bank, the growth rate is now unchanged on six months ago, with five of the eight components of the index weakening in the past half year.

“The above-trend growth pulse that emerged at the start of the year has all but disappeared,.” Westpac’s head of Australian macro-forecasting, Matthew Hassan said.

The largest drop has been a fall in consumer expectations, which is consistent with Reserve Bank Governor Michele Bullock’s assessment yesterday that households were yet to open their wallets despite a lift in wages and February’s rate cut.

“We’ve been surprised consumption hasn’t recovered as real incomes are starting to recover,” Ms Bullock said Tuesday.

The Westpac index found the turmoil created by Donald Trump’s ‘Liberation Day’ tariffs had knocked the Australian stock market and was starting to crimp the previously “positive contributions” from commodity prices. The index also found that the impact of the tariff announcements was reducing US industrial production and having a negative effect on interest rates paid by businesses.

Tuesday, the RBA revealed that it was modelling three separate scenarios as a result of US trade policy, the worst of which resulted in an all out tariff war that caused financial contagion and a hit to Chinese GDP of 4 per cent, a 3 per cent hit to Australian GDP and a rise in the unemployment rate to 6 per cent.

“Monetary policy is well placed to respond decisively to international developments,” the Bank said Tuesday.

Following the announcement of a 90-day pause by the US administration and China, the prospect of an all out trade war had softened but the Reserve Bank has stilled shaved its forecast for Australian economic growth from 2.4 per cent to 2.1 per cent in December as a result of the global uncertainty..

Westpac sees growth dropping to 1.9 per cent by year end, “a sub-par result by historical standards”.

Mr Hassan, however, said the international picture was beginning to stabilise.

“It does not look too threatening at this stage, with most of the effect coming via sentiment and financial markets rather than a hit to trade and export prices,” he said.

“As such, we continue to expect the RBA to take a cautious, measured approach to policy easing with the meeting in early July likely to see policy left on hold.”

With inflation safely back in the RBA’s target band, Treasurer Jim Chalmers is seeing pressure to use the expanded mandate to grow the economy.

He said the Government would not be distracted by the collapse of the Coalition, and said Labor is “focused on the job at hand.”

“In our first term, the primary focus was on the cost of living, getting inflation down sustainably and we will continue to focus on that.

“This second term gives us an opportunity to lay down some of the longer term foundations for a more productive economy, in getting the energy transformation right, making sure that Australians have the skills to adapt and adopt technology, making sure we get the most out of our big investments in the care economy, making our economy more competitive and productive and dynamic,” Dr Chalmers said.