Seven headwinds that Australian Economy faces today

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Australian Economy, Uncategorized

This year we have seen many downturns with regard to Australian economy. Many efforts have been taken at the macro level to withstand the challenging environment and below is a snippet of key headwinds that Australian economy faces from growth perspective:

Mining Slowdown: Mining construction fell 12 per cent in 2015 and the fall is gathering pace this year as there is a cut in the mining construction in between 1 per cent to 1.5 per cent a year from GDP growth over the next three years. On the other hand, the mining exports and production are growing strongly by about 8% a year for the past three years as producers are increasing output to offset lower prices. Moreover, the mining investment has continued to decline sharply, as more projects reached completion. The ABS capital expenditure (Capex) survey, along with Bank liaison, suggests that the decline in mining investment is likely to continue, although the largest deduction from GDP growth is expected to be in the current financial year. The mining investment is currently 4 per cent of nominal GDP, down from its peak of 8 per cent in 2012 and is expected to pick up over the period ahead, reflecting further increases in resource exports particularly liquefied natural gas (LNG).

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Business Investments (Source: Reserve Bank of Australia)

Inflation scenario: Inflation has been quite low and is expected to remain low for some time. Underlying inflation fell <0.25% in the March quarter. Furthermore, the consumer price index (CPI) lost 0.1% to be 1.3% higher over the year, due to falling fuel prices. Accordingly, the March quarter 2016 inflation data was lower than expected indicating a broad based weakness in domestic cost pressures, low wage growth, heightened retail competition, soft rental and housing construction markets and declines in the cost of business inputs like fuel and utilities. Moreover, there was some upward pressure on the prices of tradable items post the depreciation of the Australian dollar from the past few years.

Interest Rate Cuts: Recently, the RBA decided to maintain their benchmark rate at 1.75% to continue supporting domestic demand and credit growth. The business credit is growing strongly over the recent months which shows the re-intermediation of business debt. The business credit has been broad based across lending to both private non-financial corporations and smaller businesses. In addition, the foreign banks have increased their market share to around 15% as compared to last year due to the increase of local operations from Japanese, Chinese and Singaporean institutions. Meanwhile, prior to the May cash rate reduction, the estimated average outstanding cost of business borrowing had risen slightly in recent months, reflecting higher variable rates, along with increases in rates for products linked to market interest rates. Moreover, Australian corporate bond issuance for the year to date (as per May 2016 update) has totaled $5 billion, which is low as compared to recent years.

Housing Prices taking a hit: The supervisory & regulatory measures have strengthened lending standards in the housing market and a number of lenders are taking a more cautious attitude to lending in certain segments. Meanwhile, the dwelling prices supported by low interest rates environment but considerable supply of apartments, are scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Moreover, the situation in the established housing market stabilized over the past two quarters as the housing prices increased in the early months of 2016, after falling slightly in the December quarter of 2015. However, the pace of growth is likely to moderate, with the decline in building approvals since last year. Following the May rate reduction, banks lowered their standard variable rates by 19–25 basis points. Price growth is now expected to be sluggish nationally in 2017. Recently, Moody’s reported that low interest rates and house prices surge, particularly in Melbourne and Sydney may create a lot of divergence between house prices and incomes.

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Consumer Sentiment: The Westpac-Melbourne Institute Consumer Sentiment Index for Australia witnessed a fall of 3.0 percent to 99.1 in July of 2016, compared to a 1.0 percent drop in June. Expectations over economic conditions over the next 12 months declined by 6.1 percent in July while the outlook over the next 5 years was relatively steady. The gains in asset prices drove household wealth while there is a rebalancing of economic activity away from the resources sector towards other sectors. Moreover, the activity in the non-resource sectors of the economy increased at an above-average rate over 2015. However, the growth in household consumption picked up in the second half of the year driven by relatively strong growth in New South Wales and Victoria. Moreover, the factors for the consumption growth include solid employment growth and low interest rates, as well as the ongoing effects of lower petrol prices and a further increase in household wealth. But, the growth in the household disposable income remained below average and the saving ratio has continued to decline. In addition, the retail sales volumes grew at a similar pace in the March quarter as in late 2015, while the motor vehicle sales to households fell in early 2016, still at a slower pace than in late 2015.

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Employed persons and unemployment rate (Source: Australian Bureau of Statistics)

Rising unemployment scenario: According to the Australian Bureau of Statistics (ABS), employment rose by 7,900 in seasonally adjusted terms in the month of June 2016. This slightly misses the expectations for a gain of 10,000 jobs. The total number of employed is now 11.94 million and over the past year employment grew by 1.9%. However, unemployment has moved up to 5.8 per cent from 5.7 percent in the previous three months, and this is said to be the first time in five months that unemployment has gone up in Australia. Full time employment rose by 38,400 balancing a 30,500 drop in part time employment. Overall, the labor market has been mixed, but consistent with the expansion of employment in the near term. The exports of services, in particular has increased significantly over 2015 and imports of services have declined.

Dollar Fluctuations: The demand for Australian production in trade exposed industries are boosted by the depreciation of the exchange rate since early 2013 and the recent appreciating exchange rate could complicate the scenario.

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Movement of AUD (Source: Reserve Bank of Australia)

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