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Australia Economy: Steady and good growth despite risks

by Dr. Rumki Majumdar
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    18 May 2018

    Australia Economy: Steady and good growth despite risks

    19 May 2018
    • Dr. Rumki Majumdar India
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    • A sustained growth run
    • Risks that can drag growth
    • Policy perspectives

    The outlook for Australia remains positive, with the economy expected to sustain its 29-year recession-free track record out to 2020. However, a potential slowdown in jobs growth, rising household debt, and weak exports could pose challenges.

    A sustained growth run

    The economy is marching along, with real GDP expanding at over 2.5 percent annually in the second half of 2017. Robust growth in domestic demand, owing to strong consumer spending and government expenditure, was the main driver of economic growth. Contribution from exports to GDP is closely tied to commodity prices, with iron ore, coal, and liquefied natural gas (LNG) together constituting more than half of total exports in 2017. The rebound in commodity export prices since mid-2016 and rising mining export volumes improved the trade balance and growth. However, in Q4, growth in real exports surprised to the downside, with both goods and services exports falling 1.7 percent and 1.9 percent, respectively, in Q4 2017 relative to Q3 2017, despite a continued uptick in global demand. Exports fell for almost all categories, with non-commodities and coal exports registering the largest fall. 1

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    Australia is expected to extend its remarkable 29-year recession-free run out to 2020 as the government and many firms continue to invest to support the growing demand.2 The economy is likely to benefit from positive global conditions stemming from a synchronized global recovery that began in 2017, increased spending in Asia, the revival of commodity prices, recent tax cuts in the United States, and low interest rates around the world. Many businesses remain optimistic as strong government consumption and investment and a pickup in private (non-mining) business investment are expected to offset a decline in residential investment. Consumer confidence has also shifted into positive territory.3

    Risks that can drag growth

    However, there are some significant risks to growth. The latest employment data revealed a sharp slowdown in jobs growth, with both the unemployment rate and underemployment rate above their long-run averages. 4 A slowing labor market for a rising population might put brakes on wages and household income growth and could be a drag on consumption growth.

    The other challenge is the potential of rising household debt owing to low interest rates. Interest rates have remained historically low, which have helped bolster demand and insulate the economy from the global economic slowdown in the past few years. The cash rate (also called the policy rate), which is now at 1.5 percent since August 2016, has resulted in a sharp rise in consumer credit and house prices, leading to higher consumer debt in the economy.5

    Although net exports have contributed positively, growth in exports has remained relatively patchy. If uncertainty grows around global trade policies, it may lead to a slowdown in global demand and could eventually threaten the sustenance of strong exports.

    However, according to Deloitte partner Chris Richardson, the risk of a possible global trade war is likely to have a marginal impact on the economy.6 He expects that Asia will again lead global growth in 2018, which will likely keep the international economy in a “Goldilocks mode” throughout the year.7 Strong growth in Asia can bode well for Australia due to robust trade relations with this region. The new LNG capacity and demand for mineral resources from China will likely keep driving export growth this year.

    Policy perspectives

    The pace of inflation built up in the second half of 2017 and has remained steady since.8 Wage growth too has remained relatively weak, due in part to structural shifts in employment and rising immigration keeping a lid on inflation pressures. At its recent meeting, the Reserve Bank of Australia (RBA) reaffirmed its commitment to accommodative monetary policy until wage growth and inflation shift decisively higher.

    With the inflation outlook expected to remain subdued, the central bank will probably refrain from raising the cash rate until at least 2019, given the mounting personal debt levels. Any rise in interest rates could impact highly leveraged households, which are likely already vulnerable to changes in asset prices and labor market developments, and fading dwelling investments derailing the pace of domestic demand growth. With the economy expected to grow at a steady pace for the next few years, there is no urgency to raise interest rates. However, if policy rates increase rapidly in the United States, the RBA may have to tighten the monetary policy to reduce the interest differential to contain the impact on capital flows and currency.

    On the fiscal side, there has been a significant shift in policies to implement fiscal consolidation. The government took several measures in 2017 to improve government revenue and proposed a few more with the objective of returning to a fiscal surplus by FY 2020–21. The government is likely to achieve its target, although the surplus might be marginal, unless growth picks up substantially.

    Overall, the balance of risks appears to be to the upside. Australia's outlook remains good, but will likely fall shy of being great.

    Author

    Rumki Majumdar is a manager and economist, and is located in Bengaluru, India.

    Acknowledgments

    Cover image by: Tushar Barman

    Endnotes
      1. Data obtained for the analysis came from Australian Bureau of Statistics sourced from Haver Analytics, April 2018. View in article

      2. As per the forecast by Oxford Economics as on April 2018, sourced from Oxford Economics macro model. View in article

      3. Data obtained from Westpac-Melbourne Institute, sourced from Haver Analytics. View in article

      4. Latest data compared with the last 15 years of the unemployment data trend; Australian Bureau of Statistics, sourced from Haver Analytics. View in article

      5. Data obtained from Australian Bureau of Statistics and Veda Advantage Ltd., all sourced from Haver Analytics. View in article

      6. Xinhua, “Consumers, homebuilding to provide less growth for Australia in 2018-2019,” April 23, 2018. View in article

      7. The Goldilocks principle is an analogy to the children's story Goldilocks and the Three Bears, in which a little girl named Goldilocks picks up a porridge that is neither too hot nor too cold, but has just the right temperature. An economy in Goldilocks mode refers to a situation where all events are perfectly aligned to sustain good growth. View in article

      8. Data obtained from Australian Bureau of Statistics, sourced from Haver Analytics. View in article

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    Dr. Rumki Majumdar

    Dr. Rumki Majumdar

    Associate director | Deloitte India

    Dr. Rumki Majumdar is an associate director and economist with Deloitte India. She writes on several contemporary economic and sector-specific issues related to India with a focus on policy implications on industries such as consumer, financial services, energy and resources, technology, and public services. She has also written on numerous economic issues about the United States and several emerging economies for Deloitte Insights in the past. She currently heads the Client and Insights research team and regularly advises Deloitte India’s executive leadership on Indian economic outlook.

    • rumajumdar@deloitte.com
    • +91 80 6188 5684

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