Aussie growth predicted to weaken in mid-term

By Jack Derwin

September 06 2016
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Investors are being told to brace themselves for tougher economic conditions, with annual growth forecast to drag as the Australian economy restructures following the mining boom.

Aussie growth predicted to weaken in mid-term

Economic forecaster BIS Shrapnel expects GDP growth to ease to 2.8 per cent in the next 12 months, with weakened growth expected as the Australian economy transitions.

BIS Shrapnel senior economist Richard Robinson says that while households still hold a healthy cushion of savings to help offset weak wages and employment, annual GDP growth could slow to a low of 2.1 per cent in 2018-19.

“Growth will again weaken over the subsequent two years as mining investment continues to decline, as residential building runs out of steam and falls sharply, and as parts of non-dwelling building plateau. The main contributor to growth at that time will be rising public infrastructure investment,” Mr Robinson said.

“Accordingly, we expect employment growth to slow and households to react to slower jobs growth and weaker residential property prices by reeling in discretionary spending. Meanwhile, soft growth in output, wages, employment, and household incomes will continue to contain underlying inflation despite the fall in the dollar.”

However, BIS Shrapnel forecasts that this economic lull will be followed by a decade-long rebound, beginning with 3 per cent growth in 2019-20

BIS Shrapnel’s analysis found that the Australian economy has performed relatively well as it manages its transition away the mining boom.

“Australia was saved by the strengthening of growth in resources exports and production, albeit at lower prices. While domestic demand and incomes are still weak, production growth remains solid, softening the shock of the mining investment downturn,” it noted.

“Given the magnitude of the shocks we have to weather, this is a pretty good outcome.”

Central to this rebound will be the valuation of the Australian dollar returning to around 70 cents after a couple of years above parity to the greenback.

“The dollar is the key to Australia’s competitiveness. It’s not productivity growth or wage inflation that do the damage. Those influences are swamped by movements in the currency. Through the period of the mining boom, the resultant high dollar and its impact on competitiveness put enormous pressure on Australian export and import-competing industries,” Mr Robinson said.

“The 25 to 30 per cent fall in the Australian dollar over the past three years has helped competitiveness. It’s now low enough to stimulate recovery in some of the more competitive dollar-exposed industries, notably tourism and education services, and that will broaden.”

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