Stay optimistic

There have been some volatile shifts in the global economy recently, prompting pessimists to declare that there’s a 50–50 chance of Australia going into recession. However, a closer look at the numbers behind the forecasts shows there’s plenty of reason for optimism.

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There have been some volatile shifts in the global economy recently, prompting pessimists to declare that there’s a 50–50 chance of Australia going into recession. However, a closer look at the numbers behind the forecasts shows there’s plenty of reason for optimism.

People keep asking me if Australia’s heading for recession. The short answer is “No, it’s very unlikely”. One of the common measures of a recession is two consecutive quarters of negative GDP growth, and the chances of this are pretty remote. Of course, you can never say never – especially if China or the US, which is the one engine that’s firing around the world at present, were to fall over – but this does not look like a rerun of the global financial crisis at all.

The only thing globally that worries us is that global growth remained sluggish at 3.25 per cent in the June quarter, compared to its usual 3.5 per cent. The big international organisations, such as the IMF, the OECD and the World Bank, have forecast that the world economy will jump back up closer to 4 per cent growth next year. I don’t see that happening.

Global and domestic outlook

Recent NAB forecasts suggest that while China is slowing, it’s not doing anything radically different from what we were expecting. There have been weaker-than-expected outcomes in India, Canada and Brazil, but things are looking up for the US, which has recovered from weak first-quarter growth. Locally, NAB Business Surveys suggest that non-mining demand is improving and confidence is still reasonable – indeed there are still more optimists than pessimists. Considering that recent surveys covered a period when the Chinese equity market was crashing, closely followed by the volatility in the Australian equity market that is not a bad outcome.

Closer to home, we’re expecting a big kick out of exports as the big LNG projects start to ship. This will contribute an estimated $12.5 billion of additional exports each quarter. The more appropriate question to ask is, “Outside of those exports, is domestic demand likely to slow down and go below 1 per cent?” I don’t expect it will.

The sharp declines in mining and related investment will remain a key feature of the economic landscape in coming years. However, we’re seeing signs that the non-mining parts of the economy are shifting upwards, thanks to record low interest rates and the lower Australian dollar, which traded at USD69–70 cents in August. Our conditions index, which measures actual business outcomes, jumped 5 points to +11 in August, lifting the trend index to its highest level since late 2009. And, as noted above, business confidence is still in positive territory.

Our GDP forecasts for 2015–16 have been revised downwards from 2.8 to 2.4 per cent due to a lower base following the disappointing Quarter 2 outcome, which saw GDP grow by just 2 per cent year on year. But we’re still forecasting this to rise to 3.1 per cent in 2016–17.

Furthermore, the unemployment rate is forecast to stabilise in coming months, and then drop to around 5.75 per cent by the end of 2016. We need export support, but we think the economy is generating enough employment in the non-mining sector – 10,000 to 15,000 extra jobs a month – to offset this and stabilise unemployment. Within this environment, the Reserve Bank is more likely than not to put interest rates on hold. NAB’s economic team forecasts that rates will remain on hold until late 2016, when they will go up moderately.

Opportunities for SMEs

So where are the opportunities? The strength is in the services sector, particularly in information and technology communications, finance and insurance, and hospitality. High-value manufacturing has also improved, and retail has improved considerably. We have expectations for a modest pick-up in consumer spending growth through to 2017. In our data, we saw signs that micro-businesses benefited from the budget. People do have money, so try and make your offering so valuable that people think it’s really important that they have it. That way they’re more likely to spend.

Finally, Australia might not be as bad as many fear on the innovation front. A new special NAB report on innovation has found that, while business worries about the lack of an innovative culture in Australia, nearly a third of firms identify themselves as highly innovative. Furthermore, those firms significantly outperform other firms in similar industries and are much more confident. Interestingly, innovative firms tend to be in “surprising” industries – with particularly high representation in manufacturing and retail. While large firms point to increasing revenues as a key driver for innovation, smaller firms also point to the need to better understand customers, to learn from past “mistakes” and to manage change. Overall, not a bad outcome and encouraging for the future.

his article was first published in Business View magazine (Summer 2015). For more articles and interactivity, download the iPad edition of Business View for free via our app, NAB Think.

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