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Earnings season and the Australian economy in focus

Right now, investors are focused on corporate profits. Australian companies are forecast to show earnings growth of between four and five per cent this results season, which is a modest result compared to recent years. This decline is in large part due to the deteriorating performance of the resources sector compared to recent results seasons.

But many indicators suggest that broader economic conditions are also deteriorating, on the back of the softer earnings season. Consequently, we expect interest rates to drop, but not until after the federal election, which is expected to take place in May.

Growth slows

The slowdown in earnings growth in Australia reflects a broader set of economic numbers that show business activity has slowed. The disappointing run of numbers has included a downtrend in business confidence over the past year.

On a seasonally-adjusted basis, building approvals figures also tumbled by 22.5 per cent year-on-year for the year to December 20181. House price data is also lacklustre, with the combined capital cities down 6.9 per cent for the year to January 31, and 1.2 per cent in month of January alone2.

Consumer sentiment has also been hurting, with the Westpac Bank Consumer Sentiment Index ending 2018 at its lowest point since September 2017, though it has recovered somewhat in early 2019. Retail spending is also down, with retail trade numbers down by 0.4 per cent month-on-month in December 20183.

Monetary policy to react

In combination, these numbers suggest that the Australian economy is likely to underperform in 2019. We believe gross domestic product (GDP) growth will be around 2.5 per cent, which is below average and under the Reserve Bank of Australia’s (RBA) forecast of 2.75 per cent.

As a consequence, inflation is likely to remain low this year. Importantly, this also means the RBA is likely to cut interest rates, because economic growth and inflation will underperform its expectations. We think the central bank will cut rates twice this year, but not until after the federal election is over, which makes rate cuts a story for the second half of the year

Overall, we expect the cash rate to end the year at about one per cent as a consequence of the softening economy.


1 Australian Bureau of Statistics, Building Approvals, December 2018. 
2 Core Logic, Hedonic home value index, February 2019.
3 Trading Economics, Australian retail sales month on month.

Author: Diana Mousina, Economist – Investment Strategy and Dynamic Markets Sydney Australia

Source: AMP Capital February 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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