The Forward View – Australia: April 2017

Modest growth as far as the eye can see.

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Key points:

  • This month we extend our forecasts out to 2019. Our framework shows a moderate cyclical recovery in domestic demand, and to a lesser extent GDP, in 2019. This follows variable real GDP growth outcomes through 2017 and 2018. Growth will be weak in Q1 and Q2 this year – with the latter due to Cyclone Debbie –  but strong through the remainder of 2017 (picking up to near 3% through the year) due to LNG exports and lagged commodity price effects. Growth then softens, to 2.3% y/y by Dec-18, as dwelling construction and LNG exports peak and weak household income constrains household consumption. This oscillating outlook in 2017 and 2018 sees few inroads made in unemployment (remaining around 5¾%) or much pick up in underlying inflation (below the 2-3% target band), before 2019 sees a modest fall in the unemployment rate (to 5½%) and a small rise in underlying inflation (to the bottom of the 2-3% range).
  • While it is too early to accurately estimate the impact of Cyclone Debbie, it will be a drag on H1 2017 economic growth. Disruptions to coal production and exports will have the largest impact on GDP, particularly in Q2, with disruption to tourism and damage to sugar, vegetable and fruit crops also weighing. There will however be some offset via the rebuilding of infrastructure, commercial and residential property over the coming year or so.
  • We see downside risks to consumer spending given poor retail trade readings and negative business conditions for the sector. On the upside, business conditions in mining (and WA) are looking better, owing to improvements in commodity prices (which are likely to unwind over time) as well as reduced drag from mining investment. Meanwhile, leading indicators of employment are suggesting stronger readings than the official data, implying some improvement in coming months.
  • House prices in the major capital cities continue to grow rapidly, resulting in concerns about the trajectory of household debt. Regulators have again moved to tighten lending standards for housing loans, particularly for interest-only and investor lending. Against a backdrop of below-target inflation and elevated unemployment, policy makers are unlikely to address their concern about household balance sheets via interest rates, with further macro-prudential measures possible. We expect the RBA to remain on hold for an extended period, before some small hikes in late 2019 as domestic demand starts to improve.
  • The AUD has gradually depreciated since late March, particularly in trade weighted terms. We maintain our projection for the AUD/USD to reach 0.70 by year-end.

For further details, please see the attached document.