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RBA Slashes GDP, Inflation Forecasts Amid Soft Labor Market

RBA Slashes GDP, Inflation Forecasts Amid Soft Labor Market
5/4/2012 12:00 AM ET

The Reserve Bank of Australia on Friday lowered the inflation and growth outlook for the economy amid softness in labor market, moderate wage growth and a weak property market. In its quarterly Statement On Monetary Policy, the central bank lowered the forecast for the gross domestic product to 2.75 percent in the year ending June 2012 from the February forecast of 3.5 percent. For the year ending December 2012, growth is seen at 3 percent, lower than previous projection of 3-3.5 percent.

The GDP is expected to grow by about 3 percent over 2012 and 2013, which are marginally lower than the previous predictions.

The outlook for inflation was also somewhat lower than that published in February. The headline inflation outlook for the 12 months to June 2012 was lowered to 1.25 percent from 1.75 percent predicted in February.

In the year to December 2012, headline inflation will be 2.5 percent compared to 3 percent projected earlier. For year ending June 2013, inflation is seen at 2.5-3.5 percent.

Underlying inflation for 12 months to June 2012 is projected at 2 percent, slightly weaker than the previous forecast of 2.25 percent. It is expected to reach 2.25 percent in the year ending December 2012, weaker than 2.75 percent forecast previously.

The RBA judges that the expected decline in domestically generated inflation in the coming months reflects moderate growth in nominal wages in a period of soft labor market conditions, and a pick up in productivity growth.

The central bank noted that inflation in the March quarter was unusually low, with various measures indicating underlying inflation was around 0.25 percent in the quarter.

The revisions to the outlook comes just a couple of days after RBA Governor Glenn Stevens announced a 50-basis point reduction in the cash rate to 3.75 percent.

The RBA seemed to be particularly concerned about weak housing market and residential building activity. Demand for new housing finance has eased slightly in recent months, despite interest rate reductions late last year, the bank said.

The bank believes that the dwelling prices have declined more gradually than was the case in late 2011. But still, the market for established dwellings remained subdued. At this stage, according to RBA, a recovery in housing construction is unlikely in the near term.

However, the central bank expects falling mortgage servicing costs, rising rental yields and ongoing population growth to underpin a recovery in construction.

The bank forecasts employment growth to remain subdued in the near term with labor-shedding across a range of industries outside of the mining sector accelerating as firms continue to adjust to the high exchange rate, weakness in the property market and weaker public demand.

The most significant external risk to the outlook is the possibility that sovereign debt problems in Europe could intensify and derail the upswing in the global economy, the RBA warned. However, it assured that the likelihood of this occurring in the near term has somewhat eased.

by RTT Staff Writer

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