The forward view – Australia: September 2016

How one assesses Australia’s economic performance at present depends in large part on which industry / geography one looks at and whether the benchmark is in real or nominal terms.

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Loss of momentum in 2018

  • How one assesses Australia’s economic performance at present depends in large part on which industry / geography one looks at and whether the benchmark is in real or nominal terms.
  • The Australian economy grew at a year-ended rate of 3.3% in Q2, the fastest pace since mid-2012, thanks to a surge in government spending. Going forward, real GDP growth is expected to ease, most clearly in 2018 after the dwelling cycle has turned and resource exports no longer contribute to growth. Our forecasts are for real GDP growth of 3.0% on average in 2016, followed by 2.8% in 2017 and 2.6% in 2018.
  • Measures of nominal income recovered a little in Q2. However growth in these measures will not revert to historical averages in the medium term amidst subdued wages growth and another expected leg down in the terms of trade, as the recent rally in commodity prices such as iron ore unwinds in 2017.
  • The unemployment rate is expected to hold steady through the forecast horizon at around 5.6-5.7%, a rate which indicates ongoing spare capacity in the labour market.
  • There is some downside risk to our near-term forecasts given the recent loss of momentum in indicators of household spending in particular, but also business conditions. These bear close watching.
  • The RBA will hold steady in the near-term, but two cuts are likely to follow in mid-2017 as low inflation persists.
  • Our Spotlight article this month explores the drivers and outlook for the dwelling construction cycle.

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