In the latest statement, the bank says the outlook will be for low household income growth, slowing business investment, and lower productivity. Yet, GDP, inflation and employment should all improve. If not a disconnect, there is at least significant uncertainty. We think recent trends point more to the downside.
Central banks’ policies
For some time there has been uncertainty around the path for monetary policy in major economies and their net effect on financial markets, particularly exchange rates. Many observers expect the European Central Bank and the Bank of Japan to announce further steps to make their monetary policy more accommodative and there is considerable uncertainty about when the US Federal Reserve will start to normalise its policy rates. Many Federal Open Markets Committee members have indicated that they believe it will be appropriate to raise rates this year, but other members have expressed somewhat different views, and financial markets have not fully priced in a rate rise until the first quarter of 2016. Although it is hard to say how financial markets will react when policy normalisation begins in the United States, it is likely that the Australian dollar could depreciate.Business investment
Total business investment is expected to fall over the next two years as mining investment continues to decline sharply and non-mining investment is forecast to recover only gradually and with some delay. Given the size of the falls in mining investment already factored into the forecasts, the most recent decline in commodity prices is not expected to lead to a significant additional fall in mining investment. However, there continues to be uncertainty around the size of the fall and the impact of the declines in commodity prices. The strength and timing of the recovery in non-mining business investment remains uncertain. Indicators of investment intentions provide little, if any, evidence of a material pick-up in the near term. Indeed, the ABS capital expenditure survey implies that non-mining investment could be lower than forecast in 2015/16. However, some of the preconditions for a stronger recovery in non-mining business investment are in place: borrowing rates for businesses are currently low and have tended to fall; survey measures of business conditions are at an above-average level; and the Australian dollar has depreciated significantly over the past couple of years. Indeed, demand for domestically produced services is expected to continue to pick up and could accelerate should the Australian dollar depreciate further. The services sector, however, is generally relatively labour-intensive. Hence, the additional capital expenditure required to meet a given increase in demand is likely to be less than if other, more capital-intensive, sectors were to play a larger role in the recovery. Nonetheless, given the significant uncertainty around the expected pick-up in non-mining business investment growth, the risks to these forecasts are assessed to be roughly balanced.Household sector
There is still considerable uncertainty about the resilience of consumption to a period of below average income growth. Consumption is forecast to grow at a rate that is slightly above average from 2016, consistent with a further gradual decline in the household saving ratio. Whether this materialises will depend, in part, on the extent to which households perceive the low income growth to be temporary. This would be consistent with households judging the low wage growth of late to be associated with the rebalancing of the economy in response to the unwinding of the terms of trade and mining investment boom. If, however, households come to view lower income growth as being more persistent, consumption growth could be somewhat lower, and the saving ratio higher, than forecast. The extent of the pick-up in consumption growth will also depend on the strength of housing price growth and its associated wealth effects. Supply constraints, particularly in Sydney, may limit the extent to which new dwelling investment can satisfy growing demand. This raises the possibility that housing prices grow more quickly than forecast. At the same time, some market segments, particularly apartments in the inner-city areas of Melbourne and Brisbane, appear to be reaching a point of oversupply. It is also unclear how households will respond to changes in housing prices. In recent years, fewer households appear to have been using the increase in the value of their dwellings to trade up or increase their leverage for the purposes of consumption or alterations and additions to housing, which may have muted the effect of wealth increases on consumption.Spare capacity in the economy
The elevated rate of unemployment, together with the low growth in wages and broader domestic cost pressures, suggests that the economy is currently operating with spare capacity. However, there remains considerable uncertainty about the degree of spare capacity in the economy and how it is likely to evolve over time. Recent changes in the sectoral composition of activity are one source of uncertainty around the productive capacity of the economy and the degree of spare capacity. The change in the sectoral composition of employment has involved a shift away from mining-related jobs that have very high output per hour worked (high labour productivity), towards jobs in the services sector that tend to have lower measured output per hour worked. This switch to activity in the services sector may reduce the economy’s measured potential output growth, unless it is offset by productivity improvements within industries. Compositional change could also produce a mismatch between jobs and the skills of available workers, reducing the effective amount of spare capacity in the labour market. However, there is little evidence of this to date. In particular, the relationship between the unemployment and job vacancy rates does not appear to have shifted from its historical pattern.
In the economic outlook, though, GDP is expected to pickup in 2016/2017, and inflation to rise, later. However, underlying inflation is expect to sit between 1.5 and 2.5% in June 2016, suggesting cuts to the cash rate are on the cards.
The unemployment rate may fall a little, later. 
Wage growth expectations are falling.
With regards to housing, the RBA says:
that the low level of interest rates is expected to continue to support housing market activity. Forward-looking indicators of housing activity, though somewhat mixed, generally point to further growth in dwelling investment, albeit at a moderating rate. Auction clearance rates and housing price growth in Sydney and Melbourne have declined over recent months.
Lending standards have been tightened in response to changes in APRA’s supervisory measures and, more recently, many lenders have announced increases in mortgage rates for both investors and owner occupiers. Housing credit growth has increased a little over recent months, with growth in lending to investors easing slightly while that for owner occupiers appears to be picking up. Supervisory measures are helping to contain risks that may arise from the housing market.
Over 2015, a number of financial institutions have made substantial revisions to the data that the RBA uses to compile housing, business and personal credit. While small revisions to historical data are not unusual, recent revisions have been large, especially in terms of the classification of investor and owner occupier housing credit. Overall, the share of housing credit extended to investors has been revised from 35 per cent of the total to 40 per cent. As the borrowers updating their personal details and by lenders reviewing the owner-occupier status of loans. This is boosting the level of owner-occupier housing credit and lowering investor credit. The net value of loan purpose switching is estimated to be $13.3 billion over the September quarter. The effect of loan purpose switching has been removed from the RBA’s measures of owner-occupier and investor credit growth so that these measures better reflect growth in net new lending. Putting the measurement issues aside, the differential pricing appears to be contributing to a pick-up in owner occupier credit growth, while investor credit growth has eased.
