Author: Dr Shane Oliver, Head of Investment Strategy and Chief Economist, published on 8 March 2018.
In this week’s Oliver’s Insights, Dr Shane Oliver looks at the economic growth in Australia and the implications interest rates and investors.
The key points are as follows:
- The Australian economy grew 2.4% through 2017, good but well below potential given high population growth.
- There is a good reason to expect growth to continue and pick up a bit: the drag from falling mining investment is nearly over, non-mining investment is turning up, public investment is strong, trade should add to growth and profits are rising. But growth is likely to be constrained to just below 3% this year and underlying inflation is likely to remain low.
- We don’t expect the RBA to start raising rates until 2019 (we were looking for a hike late this year). Australian shares are likely to move higher by year end, but to continue underperforming global shares.
Growth just muddling along
For the last few years, the Australian economy has been meandering between 2-3% growth. This remained the case through last year with December quarter GDP up just 0.4% and annual growth of 2.4% as a bounce a year ago dropped out. In the quarter growth was helped by consumer spending and public investment but soft housing and business investment and a large detraction from net exports weighed on growth.
Sources: ABS, AMP Capital
Australia continues to defy recession calls. Against this, economic growth is well below potential, with per capita growth running at just 0.8% year on year, which is below that in most major countries.
The usual worry list
Global threats aside, Australia’s worry list is well known:
- The solid contribution to growth from housing construction seen over 2013-16 has faded and building approvals are off their highs.
- Average house prices have started to edge down, with fears of a deeper crash. But in the absence of a stronger supply surge, the Reserve Bank of Australia (RBA) making a mistake and raising rates too high and/or unemployment surging, our view remains that price declines in Sydney and Melbourne will be limited to 5-10% and other cities face a more positive outlook.
- The outlook for consumer spending is constrained and uncertain given record low wages growth, high levels of underemployment and slowing wealth gains. Consumers have been running down their savings rate helped by rising wealth (to now just 2.7%), but this is unlikely to continue as property prices in Sydney and Melbourne slow.
- Mining investment is still falling with investment plans pointing to roughly 15% falls this financial year and next.
- The Australian dollar at around $US0.78 is up 12% from its 2015 low and risks threatening growth in trade-exposed sectors like tourism, agriculture and manufacturing.
- Underlying inflation is too low with a fall in inflationary expectations, making it harder to get wages growth up and with the stronger $A not helping.
- Our political leaders seem collectively unable to undertake productivity-enhancing economic reforms. And it’s unlikely this will change any time soon which is a concern with productivity falling 0.8% through 2017.
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