Overview:

• Fundamentally we have not changed our core views on the outlook for the Australian economy. But new risks are emerging and need to be watched.
• We still expect GDP to increase by around 2.9% in 2018 with strength from mining exports (LNG), public sector infrastructure  investment and a likely flow on to further strength in private investment. On the upside there is now the probability of new investment from the mining sector.  Here it is notable that our Monthly Business Survey continues to highlight the mining sector as having both the strongest levels of both business confidence and conditions with capacity utilisation rising back to nearly 90 per cent (the highest read since early 2012).
• Against that we continue to be concerned about the outlook for consumption where wages growth remains subdued (with unemployment still well above the NAIRU), electricity prices high , stalling housing wealth – especially if the authorities effectively tighten credit supply – and high debt levels. Even with some moderate uptick in wages we doubt that consumption growth will do much better than 2½% over the forecast horizon.  Certainly both our Business Survey and Cashless Retail Sales continue to point to subdued activity and poor confidence in this sector.
• There are also new downside risks in the outlook.  First is the increasing potential for trade wars to lower global growth and reduce Australian prospects.  As we have noted in a recent report, depending on what happens in the current  “tit for tat” tariffs environment we could well see the equivalent of a 5% plus increase in average US tariffs  (with retaliation) which based on past modelling could lower global growth by around ½ per cent over the next year or so (with possibly higher impacts). Finally there are some emerging signs of softness in the leading indicators on employment growth – albeit our Survey reading would still imply employment growth over the next 6 months of around 20k per month enough to modestly lower unemployment.
• At this stage we are inclined to still see the balance of risks as neutral but possibly a touch to the downside.  Overall we see upside risks from commodity exports, and infrastructure  offset by risks from consumption. For 2019 we expect growth of 2.9% and 2.6% in 2020.
• This would still see unemployment edge down to near 5% by mid 2019 and core inflation above the bottom of the RBA 2-3% target range in late 2019 and is consistent with wages growth around 2½% in 2019. At this stage we also still see the RBA starting to increase rates from mid 2019 – but this is very data dependent and it could well be that the timing may be delayed.

For further details, please see the attached document:

• The Forward View – Australia: July 2018 (PDF, 210kb)