NAB grows cautious but still sees soft landing

The National Australia Bank has gone a bit gloomier, cutting its economic growth forecast and raising its inflation estimates for 2022 and 2023 while altering its thinking on how quickly the Reserve Bank will lift rates.

But for all the newfound caution, the NAB is not looking for the economy to tip into a big black hole.

The bank said in its updated outlook of the Australian economy on Wednesday that it sees a “soft landing” for Australia with the impact of supply constraints unwinding while wage growth reaches a sustainable limit.”

“GDP growth is expected to slow, but remain positive and we don’t expect unemployment to rise materially above a level consistent with “full employment”, the bank economics team said in the new set of forecasts.

The new estimates were issued around the time of the national wage decision was being delivered on Wednesday morning, so did not incorporate the 4.6% and 5.1% rises awarded to lower paid workers.

The NAB’s new figures also came just over 12 hours after Reserve Bank Governor, Philip Lowe revealed the central bank now saw inflation reaching 7% by the end of 2022, with a series of interest rate rises still needed.

In his surprise interview, Dr Lowe was also upbeat (still) about the strength of the jobs market and he said the RBA expected the economy to continue to grow strongly for the next six to 12 months.

The NAB has trimmed its 2022 growth forecast (GDP) to 2.7% from its previous forecast of 3.4%, dipping even further to a weak 1.8% rate in 2023.

“We expect growth of around 2.0% in 2024. After incorporating the base effects of the national accounts, the key changes to our activity outlook come through softer consumption growth.”

The NAB also lifted its inflation outlook for Q2 and Q3 of 2022 “on the back of the unfolding energy price shock as well as greater downstream impacts of floods on food production, while the overall impact of the reduction in fuel excise is no longer expected to be as large.”

“That sees headline inflation peak somewhat above 6% (annual) in Q3 and underlying reaching a very high 5% (annual),” The NAB said. The CPI rose 5.1% in the March quarter and 3.5% on a core basis.

Like Dr Lowe, the NAB sees the jobs market as being well placed.

“Given the strength in labour demand indicators we continue to see the unemployment rate falling to around 3.5% in late 2022, but slower growth in 2023 should see unemployment around 0.2ppt higher in 2023 and 2024 – now expected to be 4% (was 3.8%) at the end of the forecast horizon.”

The NAB says the stronger inflation outlook and the RBA’s post meeting statement (from the June meeting) means “we now expect a stronger front loading of rate increases as the RBA moves the cash rate towards neutral. Our new profile sees the cash rate at 2.1% by end 2022 and 2.6% at end 2023.”

Seeing the cash rate is 0.85% after the May rise of 0.50%, the RBA could get to that 2.1% level with two more half a per cent boosts, followed by a 0.25% top up at the end of the year, according to other forecasters.

The NAB is also down on house prices – ” We also now expect larger falls in house prices over the next 18 months, led by weakness in Sydney and Melbourne but with the expectation that higher rates will impact all capitals. Overall, we see house prices ending 2022 down around 2% and then around 15% lower across 2023.”

A warning though from the NAB which said there were “a number of risks to this outlook.”

“The impact of supply shocks may bleed further into inflation expectations and wage bargaining – forcing the RBA into a more restrictive stance. The global outlook has also deteriorated on the activity side.”