Not living up to their potential

Economic growth has continued to ease in both countries in the first half of 2019. In Australia, GDP growth eased to 1.4% y/y in Q2. And while the government’s tax cuts may mean that consumption supports a pick-up in growth in the coming months, the weakness in business conditions means that any recovery will be sluggish at best. In New Zealand growth slowed to 2.1% y/y in the second quarter. And with forward indicators remaining downbeat, growth could slow even further. We think economic activity in Australia and New Zealand will remain below their estimated potential rates of growth of around 2.75% respectively through 2019 and 2020. That should keep inflation subdued in each country and cause the RBA and RBNZ to cut rates to 0.5% and 0.75% respectively by early 2020.