The Forward View – Australia: October 2018

A strong first half and continuing near term momentum but slowing into the medium term.

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Fundamentally we have not changed our macroeconomic forecasts and have slightly lowered our near term AUD forecasts.

From a higher base (reflecting revisions to history) we see the following factors as key drivers to the outlook. Public sector demand – both infrastructure spending and consumption through the NDIS – will remain strong, and will probably flow over into quite strong non-mining investment. Mining is a potential upside factor to the forecasts, with that sector now clearly reporting the strongest conditions and confidence. At a minimum the drag from falling investment in the mining sector is expected to wane as the last of the LNG mega-projects enter the production phase. It is also likely that there will be some new mining investment as depleted mines are replaced and because a higher level of capex will be required in the future to maintain production – with the now larger capital stock in the sector. The lower currency in an environment where the domestic economy is strong will also help maintain domestic growth momentum.

The housing cycle will now probably detract a touch more from growth but not more than the usual cyclical swings and roundabouts. Today we have lowered our house price forecasts (see our Residential Property Survey, Q3-2018) but fundamentally we are still forecasting a soft landing – with house prices still around 15-20% above where they were 3 years ago. Again our main concern remains with consumer spending. We doubt the current momentum (to the extent it really happened) will be maintained in an environment of weak wages growth, high utility prices, falling house prices and concern about high debt levels. Drought while severe in NSW and Queensland is unlikely to be a significant drag nationally.

The net outcome of the above sees little change to our previously published quarterly growth profile, with GDP growth of around 3¼% in 2018, slowing to 2.7% in 2019 and 2.5% in 2020. That growth profile should see the labour market tighten – we maintain an unemployment forecast of 5% by mid-2019 with risk that this could be achieved sooner. Wages growth should also lift moderately (we expect wages growth of around 2.3% by year-end and around 2.5% by mid to late 2019) and inflation more broadly begin to rise. As spare capacity is reduced, and inflationary pressures become more evident, we expect the degree of accommodation in monetary policy to be gradually reduced, with the RBA beginning a process of lifting rates towards a more neutral setting. The speed at which this occurs is highly dependent on the pace at which the labour market continues to tighten and how quickly this is translated into faster wage growth. We still see the first move up from mid-2019 but clearly that is very data dependent

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