Australia: Solid ongoing boost to growth - Westpac

Analysts at Westpac suggest that there are a number of key themes that will shape the Australia’s economic outlook and they recognise a solid ongoing boost to growth from non-residential construction and government spending, as well as a resumption of the export upswing.

Key Quotes

“We expect consumer spending to be lacklustre as employment growth slows from the break–neck pace of 2017 and wages growth remains weak. Households will continue to be affected by high debt levels; the home building downturn will accelerate in 2019 while heightened political uncertainty ahead of a Federal election, due by mid-2019, is likely to see businesses delay spending and hiring.”

“For China, our number one trading partner, we anticipate a decent slowdown in 2018 to 6.3%, after the faster than anticipated growth in 2017 of 6.9%. This will largely reflect the regime’s commitment to slowing growth in the unregulated shadow banking sector which has been a key source of funding particularly for local governments which explain around 80% of infrastructure investment.”

“For the US we expect a solid boost to growth in 2018, with the tax cuts and spending boost lifting growth in 2018 to 3.0%. However tightening financial conditions and a slowdown in government spending is likely to see US growth slow to 2.5% in 2019.”

“Australia's annual real GDP growth is forecast to be 2.7% in December 2018, moderating to a below trend 2.5% in December 2019. We have lifted the 2018 forecast, from 2.5% previously, reflecting a near-term temporary consolidation in home building activity and a slightly improved starting position for the consumer. Nominal GDP growth is now forecast to be a robust 5.0% for 2018, boosted by higher commodity prices over the first half of the year, before slowing to a sluggish 2.0% in 2019 as commodity prices retreat from current highs. This retreat will reflect both slowing demand in China and a boost to supply from Australian and Brazilian producers.”

“Westpac has held a somewhat controversial position on the outlook for interest rates. Since mid-2017 we have argued for the RBA cash rate to remain on hold through 2017, 2018 and 2019. Markets have moved a long way towards our view with no RBA rate hike now priced until the first half of 2019. We query the logic there since we expect inflation and wages to remain benign while, as noted above, growth is expected to slow in 2019.”

“Our Australian dollar view is also somewhat controversial. Consensus forecasts have targeted a fairly steady AUD through to end 2018 at around USD 0.78. By contrast, we have a target of USD 0.74 by end 2018 and USD 0.70 by end 2019. This reflects our views on interest rate differentials (the federal funds rate to exceed the RBA cash rate by 0.625% by year’s end and a further 0.5% in 2019) and on commodity prices (to fall 10% in 2018 and decline a further 15% through 2019).”