The Forward View – Australia: October 2016

The outlook for the labour market is key. While we continue to expect the unemployment rate to remain in its recent range between 5½% and 5¾%, the recent softening in trend employment growth bears close watching.

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A temporary terms of trade boost?

  • Real GDP forecasts for Australia are largely unchanged at 3.0% in 2016 and easing to 2.8% in 2017 and 2.6% in 2018.
  • The unexpectedly high settlement for Q4 coking coal prices however will provide a boost to Australia’s terms of trade, nominal GDP and government revenues. However this is unlikely to be sustained, and we retain our view that the recent surge in coal prices reflects short-term supply constraints and government initiatives offshore which will not continue.
  • Business survey data suggest that while business conditions overall are above average, the broadening across industries seen earlier in the year has not endured. While strength remains in household and business services, conditions in mining are negative and  conditions for transport & storage and retail have weakened. The latter has coincided with a decline in retail profitability, but if it also reflects weaker consumer demand, this implies some risks to our already moderate forecasts for household consumption growth of 2¼-2½% in real terms in 2017 and 2018.
  • The outlook for the labour market is key. While we continue to expect the unemployment rate to remain in its recent range between 5½% and 5¾%, the recent softening in trend employment growth bears close watching.
  • House prices in Sydney and Melbourne have re-accelerated, which should prevent any further RBA hikes barring an exceptionally low Q3 CPI outcome in late October. Further cuts in 2017 remain likely.
  • Our Spotlight article this month explores the future impact of demographic shifts on labour force participation.

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