The general pessimism about Australia’s economic trajectory continued in 2015. As did the recession risk talk that first surfaced in 2013. But our economic resilience was once again on display.
When the Australian Bureau of Statistics finally rules a line under 2015 we should see an economy running at around 2½% per annum and an unemployment rate at year end below 6%. These are respectable outcomes for an economy facing an array of global and domestic headwinds. Nevertheless, economic growth rates were lower than expected at the start of the year. And the nominal economy was again much weaker than expected.
We expect the economy to grow by 2¾% in 2016. Such an outcome would be in line with our best guess on the new potential growth rate. As a result, we expect the unemployment rate to grind lower during 2016. Nevertheless, unemployment will remain relatively high. And wages growth should remain modest as a result. Contained wages growth should go hand‑in‑hand with restrained inflation outcomes.
Relative to the Australian consensus we see some upside potential on the growth front in 2016. The unemployment rate should undershoot the consensus as a result. Upside growth risks also mean modest upside risks to the low inflation consensus. From a market perspective our calls have the Reserve Bank on hold and longer-term interest rates and the AUD sitting below the consensus.
The risks and issues in the Australian economic outlook for 2016 are many and varied. As usual, it is easier to see the negatives rather than the positives. More unusually, we see more global threats than domestic issues in the mix. These issues revolve around …
The Federal Reserve
How far and fast will they move? The impact on United States markets and the economy? How emerging economies fair in an environment of higher US rates and a stronger USD? How lower oil prices interact with the Fed, emerging economies and geopolitical tensions more broadly? And what are the threats from an extended period of low rates and high liquidity?
China
The global economy is increasingly dependent on China. The risks from a structural and cyclical slowdown remain high. The structural slowdown component continues but the cycle should respond to policy stimulus.
New global themes
Emerging risks relate to how the Chinese current account surplus is recycled, the growing impact of Chinese financial markets on global markets, the completion of globalisation, the expansion of the services economy and the associated risks to trade, currencies and protectionism.
Income drag
The income drag from falling commodity prices and the growth drag from falling mining capex in Australia. Weak incomes are the one real risk of recession in Australia. But there are income opportunities as well.
Ongoing transition
The transition and some surprises. Is the residential construction boom over? Will non‑mining capex lift? Will infrastructure spending turn? And will the export and consumer growth “surprises” of 2015 persist?
Domestic challenges
How will the economy deal with drought pressures, a lower potential growth rate, the end of the house price boom, and rising financial risks?
The task for policymakers will remain as challenging as always. The RBA starts the year with a conditional easing bias. Risks remain with a rate cut. But we expect to end the year with a 2% cash rate (and a new governor). The pressures are there for fiscal repair at some point.
But the government’s decision to proceed with caution is the right one. A new leadership could see a change in direction in the May budget (and a federal election is due before year end).
Read the full CBA (PDF) report here
