Australia | Sep 17 2009
By Andrew Nelson
Without taking a bow, it’s still a pretty fair comment to make that the performance of the Australian economy over the first half of this year has been better that many economists were predicting in their year ahead reports in January. Yet despite the doom and gloom New Year’s hangover that we started the year with, consumer and business spending have responded and continued to improve on the back of some very sizeable policy stimuli. But what happens when the well dries up?
The answer is simple: the Australian economy will probably hit a flat spot, but just for a bit thinks the economics team at Westpac. On the bank’s latest forecasts we should see a steady upward lift in economic conditions, with the very real prospect of above trend growth over the second half of next year. The bank is prepared to put its money where its mouth is as well, upgrading its 2010 GDP growth forecast to a 2.5% yearly average from 1.8%, while forecasting 3.8% overall growth through the course of the year.
First of all, we’re starting off from a better position than many thought we’d be in. GDP has already increased 0.4% in the March quarter and then by 0.6% in the June quarter. Not a bad start to the year given it followed a 0.7% contraction in the final quarter of 2008. Westpac singles out the strength in Australian exports as one of the biggest factors in this success. This is evidenced by a sharp rebound in farm output (thanks to some rain, finally) and the resurgence of China. All told, net exports jumped what was a pretty startling 2.2ppts in the March quarter.
But a rebound in private demand also played its part. With some admittedly substantial government assistance, private demand rose 0.8% in the June quarter after a 1.3% decline in the March quarter. Still, we’re not out of the woods just yet, with the team from Westpac only expecting to see just 0.2% GDP growth in both the September and December quarters, as private demand begins to soften on the ever decreasing handouts from Canberra. This view supports the team’s expectation of a slight contraction in consumer spending over the September quarter, while it is also predicting that business spending on machinery and equipment is likely to slip after a bit of a June quarter spree.
However, the bank thinks inventory rebuilding will continue at a healthy pace in the background, and this will be supportive of activity over this expected lean consumer period. Otherwise, the team points out that there was a continuation of inventory run-downs in the June quarter, given the supply side was caught by surprise by the strength of spending. This leads the team to expect at least a modest rise in inventory levels. But even a lift of just 0.6% in the September quarter would add 1.5ppts to growth, says Westpac. So even if some of this stock rebuilding comes at the expense of higher imports, it will still add up to a net positive for activity.
That leads us in to 2010, when the bank thinks conditions will begin to accelerate at a healthy clip, driven by a turnaround in housing construction and a substantial rise in public sector investment. The team estimates that new dwelling construction could easily rise by 20% through next year, and while it may sound like an overly optimistic number, it is on a par with the experience in the year following the 1991 downturn. And if this jump in housing does pan out, Westpac thinks that there could be even more upside than it is now factoring in, even with the push from first home buyers dissipating.
Looking forward to what else we can expect from Canberra, Westpac doesn’t see the tap being completely turned off. It notes the Commonwealth Government has already budgeted to spend $8.6bn on building schools in 2009/10 and $5bn in 2010/11. The bank expects that this will see annual growth in total public demand, which accounts for 20% of the economy, accelerate from 2.6% now to over 6% through 2010.
Looking at private consumption doesn’t provide any disappointment either, notes Westpac, with a 3% rise through 2010 readily achievable. The bank notes that population growth is running close to 2%, plus there will be a real opportunity for households to dig out some of that money that’s been stashed away under the mattress over the last year, putting more of this year’s cash hand outs to work.
The one weak link in the chain is the risk that business investment could slow, and become a drag on growth though the rest of this year and next, especially given current high levels. But the bank now expects to see stabilisation here as well, noting profitability in the broader economy has improved in-line with domestic demand, while the international outlook for 2010 is also improving by the day. A continuation of current improving business confidence and subsequent upgrades to investment plans, as hinted at by the most recent CAPEX survey, would certainly provide some upside to counter this risk.
So beyond the current soft spot that the bank is predicting, which it thinks will be especially pronounced in the mining states, prospects are certainly improving. And even in these states, investment in energy projects is set to rise from 2010 onwards, which will be supported by a resurgent China and recovering commodity prices. This assumption suggests to Westpac that the outlook for private infrastructure activity in 2010 is set to experience consolidation at historically high levels, rather than there being any risk of a sizeable downturn.