The Forward View – Australia: November 2018

A healthy growth outlook but some concerns about the consumer.

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  • The economy grew at a strong pace over the first half of 2018 – with output expanding by over 4% in annualised terms. Looking forward, we expect growth to slow in annual terms, though still at a pace which should erode spare capacity. Public sector demand – both infrastructure spending and NDIS-related consumption will remain strong. We also expect non-mining business investment to benefit from additional spill-overs. Exports are expected to continue to grow relatively strongly – as the last of the large LNG projects reach full production capacity – and then level off. Mining is a potential upside factor to the forecasts, with that sector now clearly reporting the strongest conditions and confidence, commodity prices having remained high and the drag from the unwinding of the boom now fading.
  • Despite the above special factors adding to growth, our main concern remains weak consumption growth – which is likely to weigh on broader economic growth (accounting as it does for over half of all economic activity). With an already low savings rate, weak wage growth, high debt levels and some anxiety from slower growth in household wealth – we see a very cautious household sector over the next couple of years. The construction cycle is also expected to move down but, only moderately and as such its impact on growth will be small.
  • On a more positive note, recent data suggest that the labour market remains healthy with trend employment growth tracking at around 25-30k per month. This should be enough to see the unemployment rate decline further after falling to a 6-year low of 5.0% in September. Despite the strong growth and tightening labour market, the September quarter CPI suggests that inflationary pressure remains weak. While a number of one off adjustments to administered prices drove the weakness in headline inflation, our overall read is that both imported and domestic inflation remain subdued.
  • We have left our outlook for interest rates unchanged this month but our view remains heavily data dependent. While growth has been strong and progress has been made on reducing the unemployment rate, the RBA will likely want to see further evidence of a pickup in wages growth and inflation. There has been some progress on this front but the process has been gradual and is likely to remain so, with still some spare capacity in the labour market and the economy more broadly. Readings on the WPI for Q3 and labour market data for October will provide important updates on the current pace of wage growth and momentum in the labour market.

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