The Australian economy November 2016

Australian economy: near-term softness to give way to positive outlook for 2017.

Output growth has been above trend …

The Australian economy’s output performance, in aggregate, has been resilient in what remains a challenging environment, supported by record low and falling interest rates and a sharply lower dollar. This was confirmed in the June quarter national accounts, with annual growth lifting to 3.3% from 3.0% in March. That outcome is above trend, which is judged to be 2.75%.

… supported by lower rates and a lower dollar.

We have amended our growth forecasts since October. The outlook for next year has improved a little, with annual real GDP growth for December 2017 revised higher to 3.3%, up from 3.0%. Home building activity is expected to hold at higher levels for longer, as suggested by the recent rebound in approvals to record highs, and coal exports will respond to sharply higher prices. However, near-term, the risk is that growth is a little softer than previously anticipated. We now expect Q3 GDP growth of 0.4%, downgraded from 0.7%, on weaker retail spending and less favourable net exports. For the year to December 2016, growth is 2.7%, lowered from 3.0%. This month we have rolled in our detailed growth forecasts for 2018. The turning down of the home building boom will be a key dynamic in 2018 and contributes to our expectation that annual GDP growth will slow to 2.5% in December 2018.

But, mid-2016, economy hits a soft-spot ...

On national income, notable is an emerging ‘stabilisation’ in the terms of trade after a 34% retreat over the four years to 2015. In the June quarter, the terms of trade rose by 2.4%, with the prospect of further near-term gains as commodity prices bounce off their lows. While we characterise these developments as evidence of an emerging stabilisation, the rise in commodity price (particularly coal) includes an element of overshoot. For the terms of trade, we expect a 16% rise in 2016, followed by a 14% pull-back in 2017. Nominal GDP growth strengthens from 2.0% in 2015 to a forecast 7.0% in 2016 and then dips to 2.0% in 2017. The temporary jump in commodity prices, while unlikely to greatly alter spending decisions across the broader economy, will provide a significant boost to mining profits and government revenue.

... as jobs growth and consumer spend slow.

Conditions across the domestic economy remain uneven, with a growth divide between the mining states, feeling the impact of the mining investment downturn and earlier commodity price falls, and the non–mining states. Mining investment fell 36% over the year to June, directly subtracting 1.6ppts off GDP. With around 75% of the investment downturn behind us, this drag will moderate to a forecast 0.5ppts in 2017. Taking a more complete view, the impact of the resources sector on GDP was broadly neutral over the past year, with the investment drag offset by expanding resource exports and weaker capital imports.

2017 outlook positive ...

The key elements of the non–mining economy (household and public demand, as well as net service exports but excluding business investment) grew at an above trend pace over the past year, up 3.9%, adding 3.2ppts to GDP. Lower interest rates and a lower dollar are boosting housing and net service exports. Also, public demand is no longer the headwind it was. A near 2% contraction in 2014, as governments focused on budget repair, gave way to a near 4% rise over the past year. The public sector is hiring again, boosting frontline services such as health, and lifting infrastructure investment. Despite this, as highlighted previously, non-mining business investment in aggregate remains sluggish, for now.

... as recent RBA rate cuts have an impact...

The export sector is a bright light, and will remain so in 2017, with volumes up 9.6% over the year to June, contributing 2.1ppts to GDP growth. This is the strongest annual growth in exports since 1997 (excluding the Sydney Olympics period in 2000). Resource exports rose 15% over the year, as additional capacity came on stream, contributing 1.9ppts to activity over the period. Moreover, service exports are performing well, expanding by 6% over the past year, boosted by the lower dollar, as discussed in detail in our October article, Service exports performing strongly, supported by the ‘new China’.

... and commodity prices spike.

Notwithstanding the generally positive tone of the June national accounts and the more positive outlook for 2017, conditions have become a little patchier as we progress through 2016. In particular, consumer spending slowed in the June quarter, increasing by only 0.4%, and we now expect a rise of 0.5% for September, weighed down by a 0.1% decline in retail sales. Employment growth has slowed to only 0.6% annualised so far in 2016, following an overshoot in 2015, weighing on wage incomes and constrained consumer spending. Also, since late 2015, there has been some re-emergence of household risk aversion in part due to uncertainty around public policy, including taxation, ahead of the July 2 Federal election.

Nevertheless, we expect employment and consumer spending to regain momentum as we move into 2017. Importantly: RBA rate cuts in May and August are having an impact; national income is being boosted by higher commodity prices; and the Federal election is behind us. The latest monthly retail sales provide tentative evidence that spending is emerging from the recent soft-spot, with sales up strongly in August, 0.5%, and September, 0.6%, led by NSW and Victoria. On employment, our Jobs Index points to moderate gains in the months ahead.

Andrew Hanlan, Senior Economist

Reproduced from the November 2016 edition of Westpac market outlook

Business focus also has the following articles from the November 2016 edition of Westpac's Market Outlook;

Australian interest rates November 2016

Australian dollar November 2016

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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