'Its tough to ask, let alone achieve, a pay rise in these conditions'

If you have a big mortgage, a business loan or some savings put aside, the outlook for interest rates will be an important issue as you plan your finances over the next year or two.

On that score, financial markets are pricing in two 25 basis point interest rate hikes over the next 18 months which would take official interest rates from the current 1.5 per cent to 2.0 per cent.

That pricing is based on a lemming like following of the extremely optimistic outlook presented in recent months by the Reserve Bank which has as its central themes, a strong acceleration in GDP growth, falling unemployment and a solid pick up in wages growth and inflation.

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This optimistic scenario might turn out to be a good forecast, in which case, the market pricing will be correct.

But if there are any shortfalls in this rosy outlook for the economy, those interest rate hiking expectations will be dashed and the market will re-price the outlook for steady and maybe even lower interest rates into 2018 and 2019.

Rather than the wing and a prayer forecasts and the RBA and an increasing number of market participants, let’s look at some of the hard facts on the Australian economy.

Importantly, inflation is below the bottom of the RBA target range and has been for several years. At the same time, wages growth is mired at a record low which is not only hurting the purchasing power of consumers, but it is also ensuring selling prices, inflation in other words, is likely to remain in check.

In terms of the labour market, the “great news” on employment in recent months has not been matched by any material move in the unemployment rate, which remains at 5.6 per cent, or the underemployment rate, which remains just below a record high a little below 9 per cent. It appears that the bulk of the rise in employment in recent years is merely absorbing the increase in population, rather than making inroads into unemployment.

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It is tough to ask for, let alone achieve, a pay rise in these conditions.

Little wonder, then, that consumer sentiment continues to record more pessimists than optimists.

At the same time, there is a clear cooling in housing activity. New building approvals have fallen from the peak levels of 2016 and very early 2017, meaning the contribution to GDP growth into 2018 from housing will be neutral at best.

House prices in the troubling Sydney market have stalled. This is welcome news. While it is early days in the apparent correction in prices, the slide in auction clearance rates and increase in new properties being listed for sale, suggests a period of some further price weakness is ahead. The only problem market for house prices is now Melbourne. Prices in other major cities are either moderate or falling.

Despite relatively good news on the global economy, Australia’s commodity prices are generally weaker, having fallen 11 per cent since January. The relatively strong Australian dollar is also acting as a further constraint on the potential export boost which the RBA is anticipating.

The bottom line is that the market is getting ahead of itself pricing in interest rate hikes. It would be good news if those rate increases were delivered because it would mean the economy is strong, wages growth is accelerating and unemployment would be falling sharply.

For now, the opposite remains the case which means steady to lower interest rates are at least as likely as the rate increases the market is anticipating.