Dwelling construction is also slowing and as consumption drops off it is likely business investment also takes a hit, further weighing on GDP growth this year. The NAB business conditions survey results earlier this week further confirmed the deteriorating outlook and loss of momentum in the domestic economy, with conditions slumping the most since the 2008 crisis. Poor business sentiment was coupled with declining capex intentions which dropped to +7 in December from +15. Capital expenditures are an important forward-looking leading indicator and if this decline is sustained, it signals lower potential growth is just around the corner.
So where does the RBA garner so much optimism? Employment remains a bright spot, and the RBA is banking on a strong labour market supporting income growth to offset the negative wealth effect. The unemployment rate fell to 5% in December and is now sitting at cycle lows. The decent rise in employment in December shows that the housing downturn isn’t having a major impact on the labour market yet. But it must be remembered unemployment is one of the most popular lagging indicators, so the data only give us a rear mirror view on the health of the labour market.
Something's got to give... the dichotomy between the labour market and economic environment will not persist. In 2019, economic growth will rebound or the labour market will deteriorate, and our bet is on the latter. Annual jobs growth has slowed from 3.5% at the start of last year to just 2.2% in December and it will weaken further as the housing downturn weighs. ANZ job advertisements have fallen steadily since early last year along with other leading indicators. As the housing market slide continues it is only a matter of time before building and construction jobs lessen in NSW and Victoria where house price declines have been centred. With this backdrop in mind expect the unemployment rate to edge higher as economic activity decelerates.
The economic outlook is clearly deteriorating, and the housing downturn will continue to weigh on the economy throughout 2019. The RBA will have to strike a more cautious tone on the outlook for the Australian economy in its February meeting. At the very least, we should recognise the downside risks and uncertainties looming for both the global and domestic economies.
We expect the RBA to lower its forecast for GDP growth in 2019 from 3.5% to 3.0% when the SoMP is released in February. Although while employment remains at a cycle low, the central bank is unlikely to fully capitulate on policy guidance in February, given the optimism that has prevailed for so long.