Australia: The evolving debate on potential GDP – RBC CM

Research Team at RBC Capital Markets, notes that the Australian inflation has fallen well below RBA forecasts and the target band and this has raised questions around the size of the output gap and potential growth, among other things.

Key Quotes

“Specifically, RBA communication on the degree of spare capacity in the labour market has shifted somewhat. And, the discussion on potential GDP is more nuanced than it may appear at first; the RBA is highlighting longer-term challenges but also notes that the impact of LNG production will boost potential GDP over the period relevant for monetary policy.

This has implications for the interpretation of incoming data and how those data will feed into the RBA’s outlook for inflation and the cash rate. Sensitivity to real activity indicators is likely to increase, and signs that growth is falling short of forecasts will keep downward pressure on the cash rate.”