Key points:

• Full-year economic growth in 2017 came in at a relatively subdued 2.3%, disappointing the RBA and Consensus’ expectations, but in line with our forecasts at the beginning of 2017. The composition of growth was a little less tilted towards consumer spending than expected (despite our cautious and below consensus view at the time), and dwelling construction peaked a little earlier, while business and government infrastructure investment outperformed expectations. While growth was slow, the composition in 2017 was encouraging from the perspective that it will boost the future capacity of the Australian economy. Weak wages outcomes in the face of strong employment growth however remained a source of disappointment through 2017, partly owing to poor labour productivity growth.
• We continue to see the economy gathering some speed through 2018, as business and government investment, as well as LNG exports contribute to growth. As a result, we see annual average growth of 2.8% in 2018, followed by 2.6% in 2019 and 2.8% in 2020, with the composition of growth more encouraging as time progresses – that is, driven more by domestic demand, including some uplift in consumer spending as wages slowly accelerate. Nominal GDP growth (and national income measures) will accelerate later in the piece, as a weaker outlook for key bulk commodities and the terms of trade declines weigh less in 2020.
• Employment growth surprised significantly to the upside through 2017, with more than 400K jobs created, approximately 300K of which were full-time. The NAB Business Survey suggests further strength in employment growth of 27K per month in the near term, which will somewhat softer than the current trend in official employment growth, continues to suggest labour market strength through 2018. We are forecasting the unemployment rate to head down to around 5% by end-18 and then hold broadly steady thereafter. This should be enough to put some gradual upward pressure on wages growth.
• Key uncertainties include the pace of improvement in wages growth, and how consumers fare amidst slowing housing prices and high debt levels. This will also be a key determinant of whether our forecasts for gradual RBA rate hikes from late this year prove correct. Meanwhile the global economic backdrop should remain generally supportive in the absence of an economic shock (particularly assuming current trade tensions do not escalate), although the composition of global growth will be a little less supportive for commodities and the terms of trade as Chinese demand slows. There is also risk of slowing in the global economy by 2020 as key advanced economies reach capacity constraints and global policy rates are tightened.

For further details, please see the attached document:

• The Forward View – Australia: March 2018 (PDF, 490kb)