Australia has enjoyed an uninterrupted run of twenty-three consecutive years of economic growth. All the more impressive given that this period was straddled by the Global Financial Crisis (GFC). Such an extraordinary feat involves a mix of good management and good fortune. This continues today perhaps in equal measure.
While the mining investment boom may have ended, the capacity expansion has translated into materially higher volumes that continue to drive exports. The Reserve Bank had been concerned about the end of the mining investment boom for some time and was hoping that lowering interest rates would help lift consumption to supplant the decline in investment. As if scripted, lower interest rates have led to appreciating asset prices (shares and residential property) that have indeed given households the confidence to spend once more.
The recent Federal Budget contained a number of unpopular measures (including welfare cuts and a tax on high income earners) that have temporarily dented consumer confidence. The likely net impacts from the proposed initiatives however are likely to be minor.
On balance the short term outlook remains positive. Low interest rates are likely to continue to provide tailwinds to residential housing construction. In addition, higher share and house prices should continue to make consumers feel wealthier, supporting consumption.
Despite this positive backdrop, an uneasiness persists for two main reasons. Firstly, our long held view of the impending fallout from China's debt fuelled residential construction and infrastructure binge has become consensus. Losses on invested capital have the potential to cause businesses and banks to fail in China which would inevitably lead to a prolonged period of much lower fixed asset investment. In turn, this is likely to translate into lower demand for Australian raw materials, including coal and iron ore. Further, any slowdown is likely to have knock-on effects to China's major trading partners, reducing global output potential.
Secondly, the increase in household consumption and residential construction over the last 12 months remains on a rather fragile footing. The resurgent consumer has been buoyed by higher asset prices, the sustainability of which is questionable. Sharemarkets are priced for perfection. Recent gains could easily be eroded given the fragility of global growth and the serious economic and geopolitical risks that abound. House price gains too have been spurred by low interest rates rather than any real fundamental and sustained improvement in incomes or wealth. Expectations of further house price gains are probably unrealistic given that house prices and debt levels remain amongst the highest in the world when measured relative to incomes.
In conclusion, the Australian economy remains reasonably positioned to record further growth in the short term. Nevertheless, the drivers of growth are relatively fragile and so a sustained multi- year growth cycle appears unlikely.
Key economic indicators
|Indicator||Last reported result||Comments|
|1.1% q/q Mar'13
|Output was driven by growth in mining volumes, household consumption and residential construction. Business investment, government spending and inventory de-stocking detracted from growth.|
|0.20% m/m Apr'14 5.70% y/y||The Federal Budget may temporarily impact retail sales but higher household wealth and low interest rates remain supportive.|
|The latest survey indicates that manufacturing activity declined in June with production and sales both lower, although new orders grew modestly.|
|12mth Outlook:||Modest improvement expected|
|-4.2% q/q Mar'14
|Result is indicative of the slowdown in mining investment (which fell 8.7% over the quarter), although this was partially offset by a modest increase in non-mining investment.|
|12mth Outlook:||Modest improvement expected|
|5.8% May'14||After a series of moderate gains in employment this year, the unemployment rate remained steady in May.|
Official Cash Rate
|Although headline inflation is now near the top of the RBA's 2% to 3% target range, underlying inflation (as measured by the trimmed mean) has remained stable at 2.6%p.a. Although the Federal Budget has dampened confidence somewhat, we expect this effect to be short-lived. Overall low interest rates and higher household wealth remain supportive of consumption, residential construction and house price growth. These factors are likely to put upward pressure on inflation.|
|12mth Outlook:||We expect a 0.25% rise in the official cash rate in the December quarter.|
|A$/US$0.9417||The AUD rose by 3% over the year and by 1.6% over the quarter. The mildly positive domestic outlook coupled with further monetary easing in Europe should exert upward pressure on the dollar. This could be more than offset though by the gradual withdrawal of monetary stimulus in the United States and risks of a potential slowdown in China.|
|12mth Outlook:||Nominal devaluation expected|
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