The Forward View – Australia: April 2018

Still see growth momentum improving.

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  • Fundamentally we have not changed our core activity and financial forecasts, but have allowed for marginally higher near term commodity prices and a weaker labour market. After a somewhat disappointing 2017, we continue to expect growth to gain more momentum during 2018 – with GDP increasing by around 3% through the year or 2.8% in year average terms. That is very much reflecting increased infrastructure spending by governments (underlying public investment up 7%), some continued improvement in non-mining business (up around 6%) and the increased impact of LNG exports (net exports adding 0.6 percentage to GDP during 2018). However we see little pick up in the speed of consumption growth (around 2.5% in 2018). Recent strength in consumption was very much driven by one-offs and will still see a much weaker Q1 read. While retail has been reasonable in recent months consumers remain cautious in the face of higher electricity prices, low wages growth, stalling house price wealth and high debt levels.

 

  • We see these factors continuing into 2019 – with growth of around 2.6% (as net exports fade) and nearer 2.8% in 2020 as higher wages growth eventually feeds into higher consumption growth and domestic demand accelerates above 3%. The negative impact of lower terms of trade (falling commodity prices) should also ease in 2020.

 

  • While business conditions remain at very high levels (trend conditions of around +17 vis long run averages of +5.5) business continues to use better profits to pay down debt and balance sheet strengthening – with any spare cash then being directed into investment spend (business credit in that environment is very subdued). Against that the Business Survey continues to point to a strengthening labour market – with growth in jobs around 20k for at least the next 6 months. As a result we continue to see unemployment falling to around 5 per cent by year’s end. That of course depends on the participation rate not continuing its “puzzling rise”.

 

  • A tighter labour market, consistent with a falling underutilisation rate (as employers continue to report increasing difficulty in finding skilled labour) should see some modest improvement in private sector wages growth (to around 2¼% by late 2018). It is also likely that family income growth will be boosted by tax cuts in the upcoming Budget.

 

  • We continue to see this environment – together with above trend global growth (see our global forecast update tomorrow) – as consistent with the RBA gradually withdrawing emergency low monetary policy settings from late 2018. However nothing will happen until wages growth accelerates and the RBA will be very cautious and data driven.

 

For further details, please see the attached document: