Slowing spending makes rate cut more likely: Bill Evans

Westpac is forecasting consumer spending growth to slow to below 2% for the four quarters to June 2012, which the bank says makes the case for a rate cut even stronger. 

Along with “anaemic credit growth of 3% and modest falls in house prices it seems clear that interest rates are well into the contractionary zone,” writes the bank’s chief economist Bill Evans in the September Coast-to-Coast report. 

“With global growth prospects deteriorating there is a strong case for lower interest rates. That will provide a circuit breaker for the current slowing and help moderate the impact on the economy of the global downturn,” he says. 

Since July Westpac has been forecasting interest rates to be cut by 25 basis points by December and to fall by a total of 100 basis points over a 12-month period.

 

Source: Westpac

Evans says the Reserve Bank has acknowledged the need to revise down its “very optimistic growth forecasts” released in August but has not recognised the need for lower interest rates. 

“It seems clear to us that the Australian economy has entered a difficult period where domestic prospects are deteriorating; labour markets are weakening; and dismal news abroad will weigh further on confidence,” Evans says. 

Westpac has a more pessimistic outlook on the Australian economy than the RBA. 

The bank is forecasting Australian GDP growth to average 1.2% for 2011 and 2.5% for 2012, compared with the central bank’s forecasts of 2% for this year and 4.5% for 2012. 

The report also highlights a “loss of confidence amongst consumers and business” with a downturn in the labour market and private business conditions softening. 

“[These] will weigh on household income growth and reinforce recent consumer concerns about their job security. In this environment consumer spending is set to revert to the sub–par pace that has been evident for much of the time since the global downturn,” Evans says.