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The Australian economy enters 2020 without its normal mojo. While we can point to an amazing record of 28 years without a recession, businesses and consumers are very wary about the economic outlook (and more cautious than underlying economic conditions might warrant).
This wariness has of course been accentuated by the summer’s devastating bushfires, with a long recovery process ahead. Bushfire recovery is likely to dominate the policy agenda over the next year, with both government and business called upon to invest significant sums to rebuild.
Deloitte Access Economics’ latest Business Outlook publication suggests that Australia’s modest GDP growth performance of 1.8% in 2019 might lift only marginally to 2.1% growth in 2020.
Australia has been battling the dual demons of drought and housing-related negatives. That is now being accentuated by cratered confidence among consumers and business. Falling confidence has a few causes, including this summer’s bushfires and the Reserve Bank’s messages on the economy. That has left confidence worse than the economy itself, which in turn risks becoming a self-fulfilling prophecy.
That leaves Australia locked into slow growth. 2020 won’t see the nation’s growth lift all that much from today’s decade low, and we don’t expect unemployment to drop or wages to accelerate through 2020: we’ll be comfortably treading water rather than roaring into recovery.
Yet there are important positives within the outlook, including cuts to taxes and to interest rates, as well as a lower Australian dollar and a rebound in housing prices. The latter is bad news for housing affordability and will add to our debt burden, but it does help to steady the outlook in the near term. The path for housing construction will be important to Australia’s economic trajectory in 2020. New housing starts are set to fall further in 2020 to 166,000 (from 179,000 in 2019 and 225,000 in 2018), but a continuation of the rapid rebound in house prices could also see a quicker turnaround in activity.
Interest rates are really low, and that’s where they’re set to stay for some time, because inflation is rather harder to generate than it used to be. (The flipside is that jobs are easier than ever to generate.) That means interest rates are being set at levels aimed to get inflation going again. Here in Australia the Reserve Bank wants the US Federal Reserve to pitch in to help. But, with reasonable jobs growth in the US and a record high share market, that doesn’t look likely. So the likelihood is that the RBA will cut rates twice more (to 0.25%), partly as the economy is still weak, but mostly because inflation is so stubborn. If that is the case, and with commodity prices off their mid-2019 peaks, the Australian dollar is likely to remain at the lower end of its trading range.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.