A new phase

The Australian economy is entering a new phase where the drag on GDP growth from mining investment is coming to an end, but the boosts to growth from dwellings investment and consumption are starting to fade. The net result is that GDP may rise by only 2.0% this year and by just 2.5% in both 2018 and 2019. That would fall well short of the RBA’s lofty expectations of gains of 3.0% and 3.25% in 2018 and 2019 respectively. When taken together with our view that underlying inflation will remain below 2.0% for another two years, this explains why we don’t expect interest rates in Australia to rise until late in 2019. Faster GDP growth may mean rates in New Zealand rise in the first half of 2019, but that would still be later than the financial markets assume. As such, we expect both the Australian and New Zealand dollars to weaken.