12/10/2018
The Australian economy has weathered the forecast of an impending recession of those sentenced to death for 27 years. According to this economist, it is likely that this growth will continue for some time – but that does not mean that the RBA will change its interest rates
The Australian economy grew by 2.4% in 2017, which is good, but well below its potential, given the country's strong population growth. There is good reason to expect that growth will continue in 2018, the slowdown in the fall of mining investment, the contraction of non-mining investment and the vigor of public investment. That said, Australia's list of concerns is well known:
The solid contribution to the growth of housing construction seems to be over. Average house prices have started to fall and the booming cities of Sydney and Melbourne are now quite low.
The outlook for consumer spending is limited and uncertain, given the record low wage growth, the high levels of underemployment and the slowdown in wealth gains due to falling real estate prices.
Banks are tightening their lending standards.
Mining investment is still low.
Underlying inflation is too low, with a fall in inflationary expectations, making it more difficult to grow wages.
Our political leaders seem collectively unable to undertake economic reforms aimed at increasing productivity.
Why Growth Will Be OK
These contrails are significant, but there are five reasons to avoid a recession and an OK growth.
First, the fall of mining investments is almost complete. As a percentage of GDP, mining investments have already returned to normal and some miners are beginning to consider new projects.
Second Non-mining investments are on the rise. Comparing business investment plans for this year with those of last year, this is the best result since 2013.
Third, we are witnessing an explosion of spending on state infrastructure.
Fourth exports are expected to further contribute to growth, thanks to the completion of resource projects and the strong growth of tourism and higher education exports.
Finally the profits of listed companies increase. This is a positive element for investment.
Thus, while housing is slowing down and consumer spending is limited, these considerations should lead to growth of 2.5% and 3%. However, growth is expected to remain below the Reserve Bank's forecast of a recovery of 3.25%.
As a result, and with wage growth and inflation likely to remain weak for some time, we do not expect the RBA to rise before 2020 at the earliest. And in fact, the next move, a rate cut, can not be ruled out.
Consequences for Investors
There are several implications for Australian investors. Continued growth should provide a reasonable framework for Australian growth assets. But bank deposits may generate poor returns for some time. And with the RBA on hold and the Fed raising policy rates, the path of least resistance for the Australian dollar remains on the decline.
For real estate investors, it's a mixed bag. The cities of Sydney and Melbourne, which are experiencing a period of economic prosperity, will probably experience further price declines, with declines of around 15% due to lack of affordability, rising prices supply, tightening of bank lending standards and lower investor demand. But other cities and regional centers offering decent rental yields should benefit from continued economic growth and low interest rates.
Shane Oliver
is AMP Capital's Chief Economist and Head of Investment Strategy,
.
and assistant professor of economics at Macquarie University
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