RBA: On hold, despite cyclone-related growth wobbles - HSBC

Analysts at HSBC point out that Cyclone Debbie and a very wet March on the East Coast are likely to have weakened Australian GDP growth in Q1 and Q2, but growth is expected to bounce back in H2 and HSBC maintains their view that GDP growth will average 2.8% in 2017 and also expects the RBA to look through any weather-related wobbles.

Key Quotes

“Getting a clear read on local growth has been complicated by the weather recently. Cyclone Debbie, which struck Queensland in late March, and unusually wet weather on the eastern seaboard in March (it was the wettest March in Sydney since 1975) have both affected the economic indicators. Retail sales saw a sharp fall in Queensland in March but bounced back in April. Residential construction work done also fell in Queensland and New South Wales in Q1, both partly due to weather-related effects. Coal exports, from Queensland, fell sharply in April.”

“The inclement weather will contribute to a weaker Q1 GDP print (due on 7 June), which we now forecast to be 0.5% q-o-q (previously 0.9%), and will weigh on Q2 GDP as well (we now expect 0.4% q-o-q in Q2; previously 0.7%). However, as the cyclone effect is expected to be temporary, we see a strong bounce back in growth in H2 2017. We still see year-average growth running at 2.8% in 2017 (unrevised), albeit we acknowledge some downside risk to this view.”

“For the central bank, the weather-related wobbles in GDP will make little difference to the policy view. Importantly, other measures, which are better at abstracting from the cyclone effect, such as surveyed business conditions and employment indicators, have held up well in recent months. In our view, this partly reflects the ongoing shift in growth towards the services sectors, particularly services exports, such as tourism and education, which these other indicators are doing a better job of measuring.”

“We expect the RBA to be firmly on hold with a cash rate at 1.50% and to reiterate that it expects growth to lift over the next couple of years and underlying inflation to gradually climb. We expect no policy bias from the central bank.”

“On fixed income strategy, OIS rates look modestly rich against our belief that the RBA is highly reluctant to cut, but deeper expectations of easing are likely to build on soft GDP outturns. We see the yield curve flattening further from here.”