There is no place for the “R” word, but recent softening bears close watching

• There will be no repeat of Q3’s negative GDP print, with a confluence of one-off factors exaggerating the degree of weakness in Q3, particularly weather events impacting on construction and exports.  Our early GDP forecast for Q3 suggests a rebound in Q4, although the lower base has led to a downgrade to our 2016 and 2017 growth forecasts, which now stand at 2.3% and 2.4% in annual average terms respectively.

• The risks near-term are tilted to the downside however with a significant slowdown in indicators such as business conditions, employment and household spending, as well as in the largest non-mining states of Victoria and NSW (see Spotlight article on NSW on page 5). For now, we are treating this as a “mid-cycle” loss of momentum in non-mining, with domestic demand to grow at a moderate (albeit below-average) pace in late 2016 and early 2017.

• Further out, our forecasts continue to include a notable slowdown in year-ended growth rates in 2018, which risks a rise in the unemployment rate should further cash rate cuts not be delivered as we expect in mid-2017. At this stage, our unemployment rate forecasts have been revised marginally higher to around 5¾% through to 2018.  Some near-term rise in unemployment is also possible should we see a bounce in the participation rate in coming months.

• The election of Trump as US President elect has led to an upward revision to our US$ forecasts and reinforced our conviction that the A$/US$ will depreciate to 0.70 by end-2017. Our expectation for bulk commodity prices and the terms of trade to retreat through 2017 (despite some modest upgrades), is also consistent with this view.

• These forecast adjustments, in conjunction with weak wages growth, more than offset the impact of (temporarily) higher commodity prices  on the federal Budget and hence add to the difficulty of achieving a surplus by 2020 – 21. A downgrade to Australia’s AAA credit rating is possible although the economic implications beyond confidence effects will be minimal.

For further details, please see the attached document. 

• The Forward View – Australia: December 2016 (PDF, 607kB)

More from NAB:

• The Forward View – Global: December 2016