«The current correction in the housing market is a significant area of uncertainty,» the RBA said in its statement on monetary policy released on Friday. «Housing prices nationally had increased by almost 50 per cent over the five years to September 2017, and they have fallen by around 8 per cent since then.
«The implications of the housing market correction for the broader economy depend on how households respond, including how they take previous price increases into account in their spending decisions.»
The biggest concern for Mr Frydenberg remains the torpid growth of household consumption, as workers reduce their spending while dwelling prices decline and wages remain stuck at historic lows.
«In the context of high household debt, currently weak income growth and falling housing prices, the resilience of consumption growth is a key uncertainty for the overall outlook,» the RBA said.
The RBA’s forecasts reveal it thinks wages growth is going to get near 3 per cent by June 2021, reaching a peak of 2.6 per cent in December 2020 and remaining there unless workers deliver a sudden burst of productivity.
If the forecast were to come to pass, it would have a multibillion-dollar impact on the federal budget which pencilled in a rate of 3 per cent by June 2020 as recently as the mid-year update in December.
Prime Minister Scott Morrison said on Friday he was not concerned about the updated outlook «because they are now consistent with our budget forecasts».
Growth rates of between 3-4 per cent have historically driven federal tax revenues by pushing workers into higher tax brackets. The RBA said some wage earners would see some boost through the 3.5 per cent increase in the award and minimum wages July 1 and this was not likely to have an impact on employment. It also noted the Morrison governmnet’s income tax cuts would give some relief to workers.
For those workers not getting pay rises, the central bank urged them to change jobs. The Household, Income Dynamic in Australia survey shows that wages growth is typically lower for workers that do not change employer. The RBA said as of June 2017 there had been no pick-up in wages growth for this group.
The lacklustre result will see household consumption figures remain at or below 2.7 per cent according to the RBA, meaning retailers — Australia’s largest employer — are facing a challenging few years ahead.
The good news is that unemployment is expected to remain low with the ratio of employment to the working-age population rising to its highest level since early 2011, driven mostly by gains in Melbourne and Sydney.
«The Australian economy is growing a little above trend, although GDP growth slowed unexpectedly in the September quarter,» the RBA said in the quarterly statement. «In contrast, the labour market continues to improve, with the unemployment rate having fallen to 5 per cent.»
The growth is concentrated in four sectors: education; health care and social assistance; construction; and professional, scientific and technical services.
Globally, it said «there are a number of other political uncertainties that could materially harm the global growth outlook, particularly if they are not resolved quickly».
China, the US and Brexit have increased downside risks. Growth in the United States is expected to moderate from the very strong rates seen in 2018 to be back around trend by 2020.
«Business investment, while growing strongly, appears to have been weaker than expected in recent quarters despite the large corporate tax cuts,» the RBA said.
The uncertainty about how Britain will exit the European Union and the outcome of the ongoing negotiations between the United States and China remained key factors.
«An escalation of trade tensions continues to be a significant risk,» it said.
This would be compounded if the US adjusted to its trade policy on automotive imports, which could lead to much higher import tariffs or strict quotas.
Analysts said the statement contained several red flags.
«It is hard to read this as anything less than a capitulation on the RBA’s long-held view that the economy is improving, and that the consumer can withstand headwinds from housing and wealth effect,» JP Morgan’s Ben Jarman said.
The RBA revised its forecast on interest rates this week.
Governor Philip Lowe said the probabilities of a cut and a rise from the current record low of 1.5 per cent were now «more evenly balanced» — particularly if there was a sustained increase in unemployment and a lack of progress in returning inflation to between 2-3 per cent.
Financial markets are now increasingly convinced the next move will be down. They have fully priced in a rate cut to 1.25 per cent from the RBA by 2020.
Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age.