Capital Economics has hit the local market with a bang, with the London-based economic research consultancy predicting the Reserve Bank's cash rate will be 1.5 per cent by the end of the year and that the local economy will grow by a paltry 1.8 per cent this year with unemployment reaching 7 per cent by December, and potentially as high as 7.5 per cent next year.
The bearish calls coincide with the appointment for the first time of a chief economist for Australia and New Zealand, Paul Dales, who believes that the Reserve Bank and economists will be forced to downgrade GDP and inflation forecasts under the increasing weight of the end of the mining investment boom.
The forecasts are well below the consensus. On economic growth, the Reserve Bank's mid-point estimate is for 2.25 per cent GDP growth, while the market is pencilling in 2.6 per cent growth.
The 1.5 per cent rates call is lower than traders are pricing in at 1.75 per cent a year from now, while most economists are more likely to see a 2 per cent trough in rates.
Economists are widely expecting the Reserve Bank to cut rates on Tuesday, while financial markets are pricing in a 58 per cent chance of a cut. Most, however, are only expecting one further cut later in the year, whereas Capital Economics are expecting two further cuts.
It's a similar story for unemployment, with the Reserve Bank guesstimating 6.5 per cent and the market 6.2 per cent.
Across the ditch, New Zealand will also be forced to reverse course on monetary policy, said Mr Dales. While not as bad off as us, after being the first of the world's developed economies to start hiking rates, the Reserve Bank of New Zealand will cut rates by half a percentage point to 3 per cent by the end of the year, he said.
"It seems to me that the end of the mining boom was always going to be a bigger and more painful adjustment than most people realise," said Mr Dales. This is a bit of an extreme analogy, but when it comes to economies once one source of demand has been turned off another isn't automatically turned on.
"On top of that, the huge 25% deterioration in the terms of trade, due to the plunge in the prices of key commodity exports, it a big hit to national income that needs to be absorbed.
"Against that backdrop, an economy can't continue to grow at its potential rate, especially when fiscal policy is more likely to be a drag on growth than a boost and when monetary policy is not as powerful as it used to be. To me this all suggests that growth will slow down sharply this year."
Capital's ten most important, non-census forecasts:
- The Reserve Bank will cut interest rates from 2.25 per cent to 1.5 per cent by December and hold it at that level in 2016;
- GDP growth will slow to 1.8 per cent in 2015, from 2.8 per cent in 2014. By contrast the mid-point of the Reserve Bank's forecast is 2.25 per cent and the consensus is 2.8 per cent;
- Unemployment will rise from 6.4 per cent in January to 7.0 per cent in December and 7.5 per cent next year. By contrast the Reserve Bank is expecting 6.5 per cent by the end of the year and the consensus 6.2 per cent;
- Inflation will fall from 2.4 per cent at the end of last year to 1.8 per cent this year. By contrast, the Reserve Bank expect it to stay between 2.25 per cent and 2.5 per cent;
- The Australian dollar will fall to 70 US cents by December from its current level of 78 US cents and to 65 US cents in 2016. The consensus forecast if for the Aussie to drop to 74 US cents;
- The Reserve Bank of New Zealand will cut interest rates from the current 3.5 per cent to 3.0 per cent by December;
- New Zealand GDP growth will slow to 2.3 per cent in 2015, from 2.8 per cent in 2014. The Reserve Bank of New Zealand, by contrast, forecast a rise in growth to 3.5 per cent. The consensus forecast is 2.9 per cent;
- New Zealand unemployment will stay at 5.7 per cent. The Reserve Bank, by contrast, is tipping a fall to 5.4 per cent and the consensus is tipping 5.2 per cent;
- Underlying inflation in New Zealand will dip below 1.0 per cent, which is below the Reserve Bank of New Zealand's target band of 1 to 3 per cent. The consensus is for a move back towards 2 per cent;
- The New Zealand dollar will rise to parity against the Australian dollar from 97 Australian cents now. This will be the first time this has happened since both currencies were floated in the 1980s.
