UBS predicts cut to cash rate and believes more needs to be done to boost economy in face of low wage growth

This article is more than 10 months old

This article is more than 10 months old

The Reserve Bank will have to cut the cash rate to 0.25% by the middle of 2020 in order to prevent the economy going backwards, according to a new report.

Despite the prospect of a “mini boom” in house prices and increased public-sector spending, the investment bank UBS predicted on Wednesday that more needed to be done to boost the economy in the face of low wage growth and consumers’ reluctance to spend their spare cash.

Concerns about household spending were highlighted by official figures on Wednesday showing that wages grew less than expected in the last quarter. Earnings are now on course to grow by just 2.2% for the year and economists expect that number to fall further as unemployment ticks up.

Retailers added to the uncertain outlook by predicting that they expect the worst Christmas shopping season for six years, according to another separate survey on Wednesday by Deloitte.

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In a major 400-page report, UBS economists, who accurately forecast the RBA’s three rate cuts this year, looked at the prospects for the Australian economy as well as the outlook for the rest of the world.

Even assuming that the US-China trade dispute does not worsen, they expect the RBA to act again because Australian household income remains stuck near a record low, dragged by weak wages and average earnings. The Morrison government’s much-heralded tax cuts “should be a significant boost”, they said, “but appear to have been largely used to repay debt so far” rather than pumped back into the economy through extra spending.

Most data on the economy is weak. Consumer sentiment is soft, credit growth is at a record low, retail sales are flat, car sales have seen the longest fall on record and home building approvals are at a six-year low with flatlining commercial building. There is also the negative impact of the drought on farm production.

These factors mean unemployment would drift up in 2020 to 5.5%, UBS said, keeping wages down and dampening growth to 1.7% this year and 2.1% next year.

“This underpins our dovish view the RBA cuts the cash rate another 50bps to 0.25% by mid-2020, and then ‘lower for longer’,” UBS said, in a forecast that means borrowers can expect ultra-low interest rates for several years to come.

There was also the chance that the RBA will have to resort to “unconventional” measures such as quantitative easing, a type of money printing scheme seen in the US, Europe and Japan in the past decade.

After the ABS wages figures, the consultancy Capital Economics also predicted that the RBA would have to cut rates again, starting in February.

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The retail industry has been a mainstay of the Australian economy but spending was an anaemic 0.2% in September, softening from an already underwhelming 0.4% in August despite the $22.4bn worth of tax cuts from the Coalition.

Only two-thirds of retailers – 62% – expect to see higher sales this season, down from 80% last year, according to the Deloitte retailers’ Christmas survey of 56 senior executives from the sector.

“It’s clearly been a tough year for many retailers,” said Deloitte retail group leader David White. “So it’s probably no surprise many are also approaching this Christmas with a little less cheer, certainly compared to last year.”

Westpac’s closely watched index of consumer sentiment rose 4.5% in November, the bank said on Wednesday, after a sharp fall of 5.5% in October. Chief economist Bill Evans suggested it was because the RBA kept rates on hold this month compared with a cut in October.

“The result supported the general view that consumers were somewhat unnerved by the announcement of low rates and media controversy around the banks’ responses,” he said.