Australia | Aug 26 2015
-Fall in AUD to broaden recovery
-Business not yet ready to invest
-Further 18 months in dwelling upswing
By Eva Brocklehurst
Tough times for the Australian economy are set to continue for some time. The fall in mining investment has just begun and a softer period of three years is envisaged for Australia before a rebound to a more solid five-year growth average. Industry researcher BIS Shrapnel makes this observation in its flagship economic report, Long Term Forecasts 2015-2030.
The forecasts suggest a possible small contraction in GDP growth in the June quarter just past, before a rebound over the September and December quarters that lifts growth back above 2.0%. The report expects GDP growth of 2.5% in 2015/16.
The down-dip is not expected to presage a recession, associate director of economics, Richard Robinson maintains. Still, the June quarter's reversal of net exports, after being the driver of growth in the preceding three quarters, will add to the other negatives on the immediate horizon, such as the downturn in mining investment, infrastructure and public building activity.
This should be offset by modest increases in non-residential building and public engineering construction. Net exports remain the key drivers of growth over the medium term and should be supported by a lower Australian dollar. BIS Shrapnel forecasts GDP growth to average 3.1% over the next five years but adds the caveat that this depends on a broad-based rebound late in the decade.
In this aspect, the magnitude of the fall in the Australian dollar bodes well for the outlook and should hasten structural change. Mr Robinson observes the depreciation of nearly 20% since April 2013 is is already beginning to stimulate tourism and education services. After a decade putting up with a high Australian dollar, tourism should be making up lost ground.
Other industries which should benefit are export and import competing sectors such finance, business services, agriculture and parts of manufacturing as well as mining.
The mining construction boom, which underwrote the last decade, has peaked and will now detract from growth. Mr Robinson observes 2014 was the start of a four-year decline which will reduce mining investment by 60% from its peak.
Yet, the report also suggests business is not ready to invest, as demand and profits are weak. There is also the issue of excess capacity. Mr Robinson discounts the effect of interest rate reductions, which are not expected to stimulate investment. Rather, a recovery in demand and a tightening of capacity should do the trick.
The report suggests a further 18 months of strong residential building before the current upswing in the dwelling cycle abates. However, this will not be uniform, with sizeable deficiencies in stock driving the market in parts of Queensland and NSW in particular.
Labour markets are expected to be subdued until growth picks up and the unemployment rate rise a little further and be slow to subside. This suggests wage inflation should be contained for some time. The Reserve Bank is considered unlikely to raise official rates until economic recovery re-ignites fears of inflation.
Overall, conditions are expected to remain tight until business switches its focus from cutting costs and deferring investment to a growth model. Mr Robinson is confident that will be forthcoming eventually as the lower currency boosts trade-exposed demand.
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