The Forward View: Australia – July 2017

Encouraging signs emerging, but long-term headwinds keep RBA on the sideline.

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Overview:

  • Revisions to real GDP growth forecasts this month largely reflect a stronger than expected rebound in coal exports following disruptions from Cyclone Debbie in Q1. Our forecasts now see net exports contributing 0.3 ppts to Q2 GDP (previously a 0.4ppt subtraction), pushing GDP growth up to 0.5% q/q and 1.5% y/y (previously 0.2% q/q and 1.2% y/y). Further out, we have not fundamentally changed the tone of our forecasts.
  • The household sector remains a point of relative concern for the outlook. High levels of household debt, muted wages growth and ailing consumer sentiment all pose significant hurdles, especially as wealth effects from property prices continue to fade. In stark contrast, improved profit outcomes have seen firms reporting the best business conditions they have seen for years – back around pre-GFC levels – while business confidence is also at lofty levels.
  • How the disparity will resolve itself is still unclear, although recent indications have been encouraging, with retail conditions in the NAB Survey now showing some signs of improvement off the back of better than expected retail sales in recent months. Strong employment growth of late and signs of a lift in labour costs in the NAB Business Survey are additional signs that the benefits of solid business conditions may be gradually flowing through to households.
  • For now, we have maintained our forecast for lacklustre growth in household consumption, but acknowledge that prospect may have improved from where they were a few months ago. A moderate cyclical upturn in non-mining investment is expected, while government investment will help to fill some of the void left by mining investment. The second half of 2017 will see real GDP growth bolstered by a ramp up in LNG exports (although most of the strength will be in Q4), before softening to 2% y/y by end-2018 – as LNG peaks and dwelling construction drags, although base effects are also a factor. For 2019, growth improves moderately to around 2½% but nearer 3% y/y – as non mining investment and public spending strengthen.
  • In response to the recent strength in official employment data, we have revised up our near-term expectations for the labour market. Much of the lift reflects a ‘catch-up’ with other indicators of employment (such as the NAB business survey employment index) and likely means that growth will stabilise from here, keeping the unemployment rate steady at around 5½.
  • Given the lingering risks to the outlook, signs of moderation in the housing market, and a reluctance to see the AUD strengthen further, the RBA should be content with keeping interest rates on hold for an extended period (mid 2019).  Recent data flows have however been more encouraging, and if maintained could raise the prospect of a change in the balance of risks.

For further details, please see the attached document.