Unemployment will force the RBA to cut rates again while house prices set to rise 10%: David Bassanese

Economist David Bassanese says the Reserve Bank of Australia will cut interest rates again despite effects from rate cuts being already seen.

The Australian Financial Review columnist says rising unemployment from the mining and manufacturing industries will force the RBA to lower rates again by the end of the year.

“It’s true that asset prices especially are responding to lower interest rates, but whether this will be enough to contain unemployment in the face of the looming mining sector downturn and extreme pain from the high exchange rate remains to be seen,” Bassanese wrote today.

He says the rate cuts are having an effect on the interest-rate sensitive sectors of the economy including a moderate lift in housing demand.

Auction clearance rates lifted to their highest level since mid-2010

“As I’ve argued since last year, rising established house prices are exactly what we should be expecting at this stage. After all, measures of home mortgage affordability are below long-run average levels,” he wrote.

“My call has been that a 10% to 15% pop higher in nationwide house prices is possible by early 2014.”

He said with non-mining sector parts of the economy picking up house price growth will be more pronounced in Sydney and Melbourne.

This will lead to increased confidence and spending despite sluggish employment growth.

And retail spending has been strong so far this year while consumer sentiment remains above long-run average levels.

“So far so good, but serious questions remain over the smoothness of the transition in economic growth from the mining investment boom to non-mining domestic spending,” he wrote.

“In terms of the housing sector, for example, the upturn in home building demand remains reasonably modest and is not yet destined to provide major growth offset from the downturn in mining investment.

“Meanwhile, sectors sensitive to the exchange rate, such as manufacturing and even mining, are also feeling the pinch, with the $A remaining at relatively high levels.”

Holden has announced massive job cuts while Woodside is scaling back LNG operations.

He says the decline in business conditions have been led by the mining sector and there is extreme weakness in manufacturing.

“The labour market reflects this sectoral tug of war. The number of job advertisements measured by ANZ Bank fell in March after two promising monthly gains, while the nation’s unemployment rate ticked up to 5.6%.”

“My call is that unemployment will reach 6% by year end, which should be enough to goad the RBA into cutting interest rates again.”

Alistair Walsh

Alistair Walsh

Deutsche Welle online reporter

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