The Australian economy February 2017

Australian economy: rebounding consistent with solid outlook for 2017.

Economy emerging from mid-2016 soft spot ...

Westpac Economics expects real GDP growth of 3.0% for the year to December 2017, with the balance of recent partial indicators lending support to this view. That is a little above trend, judged to be around 2.75%, and would be a material improvement on 2016. Conditions in 2017 will be supported by: stronger income growth, as the terms of trade increases; lower interest rates, supporting housing; a lower dollar, boosting exports; and a much reduced drag and reduced negative spill-over effects from the mining investment downturn. That said, conditions will remain uneven, with a growth divide between the non-mining states in the south-east and the mining regions of the north and west. For the year to December 2018, we expect real GDP growth to slow to 2.6% as home building activity weakens.

... output growth to accelerate to 3.0% in 2017.

The economy did lose momentum in 2016. The Australian Statistician reported that the economy contracted by 0.5% in the September quarter, after a 0.6% increase in June. This is the first decline in output since the Queensland floods of March 2011, a -0.2%, and since the GFC impact in December 2008, a -0.7%. Annual real GDP growth slowed to 1.8% from 3.1% in June. We do not see this as portending a sharp deterioration in the economy. The extent of the slowdown was exaggerated by a number of one-offs. In that quarter, declines were reported for: home building activity, disrupted by weather; public demand; and net exports, each of which have been trending higher and are set to resume their upswing. The July 2 Federal election, which followed the longest campaign in recent times, would have unnerved businesses and households. Also, financial conditions were tightened over the second half of 2015, leading to a 7% contraction in housing finance over the three quarters to March 2016. More recently, finance has rebounded in response to RBA rate cuts.

Income recession over as commodity prices jump ...

On national income, notable is a sharp bounce in the terms of trade after a 34% retreat over the four years to 2015. Commodity prices have surprised to the high side due to temporary supply disruptions, a cyclical lift in China and speculative behaviour. For 2016, we estimate that the terms of trade rebounded by 16%, including a 10% increase in the December quarter. We expect a further 4% rise in 2017, frontloaded, followed by a 16% pull-back in 2018 as supply responds and demand cools. Nominal GDP growth strengthens from a weak 1.9% in 2015 to 5.5% in 2016 and 5.2% in 2017, then moderating to 0.5% in 2018. The surge in commodity prices will boost mining profits (thereby easing cost cutting), as well as lift tax revenues and export volumes but an investment response and stronger wages growth are unlikely.

... mining investment downturn coming to an end.

Labour market trends have been a key dynamic associated with the shifting momentum over the past two years. In 2015, jobs grew by a brisk 2.6% in response to the labour intensive activity of the home building boom and strength across the service sectors. However, this included an element of overshoot, which gave way to an undershoot in 2016, with employment up a sluggish 0.8%. Our Westpac Jobs Index points to a resumption of solid job gains early in 2017, consistent with rising demand across the non-mining economy.

Jobs growth to lift, after sluggish 2016 ...

Consumer spending slowed to only a 2% annualised pace over the June and September quarters, a marked deceleration from the 3.1% increase in the year to March. Households reined in their spending as the soft patch in the labour market crimped wage income growth. Going forward, households will receive a boost from a likely rebound in the labour market and from the stronger national income growth associated with the bounce in the terms of trade. We expect consumer spending growth to recover to 3.0% in 2017, but with risks centred on labour market developments.

... supporting consumer spending ...

Trends across the other components of domestic demand will be mixed. Public demand, up 4.7% over the past year, is forecast to grow by a solid 2.8% in 2017, with upside risks, as governments lift infrastructure investment and add public servants to expand frontline services, notably in health. Home building activity is expected to be broadly flat over 2017, before turning down in 2018 with approvals having retreated from recent record highs. Business investment will contract at a much slower rate, an 8% fall in 2016 moderating to a 2% decline in 2017. The end of the mining investment downturn is in sight, with work on the remaining gas projects to be progressively completed in 2017. Non-mining investment, up an estimated 3% in the year to September 2016 is expected to eke out a similar gain in 2017.

... and export sector to be a bright spot.

Exports had been a bright spot until last June / September, which saw the first back-to-back negatives for real net exports since 2011. Resource export volumes inched lower in September, -0.1%, including falls in metal ores (dominated by iron ore) and other mineral fuels (including LNG). Resource exports will resume their upward trend, led higher by LNG as new projects begin operation. The uptrend in service exports, in response to rising demand from Asia, will continue. Over the past year, a stellar 10% increase in service exports directly added 0.4ppts to annual GDP growth, with positive spill-over effects. For the 2017 year, net exports are expected to add 1ppt to growth, including a 1.5ppts addition from exports.

Andrew Hanlan, Senior Economist

Reproduced from the February 2017 edition of Westpac market outlook

Business focus also has the following articles from the February 2017 edition of Westpac's Market Outlook;

Australian interest rates February 2017

Australian dollar February 2017

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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