Australian economy set for weakest period since 90s recession, BIS Shrapnel says; Tough times are ahead for the Australian economy over the next few years
Tweet Topic Started: 1 Sep 2014, 11:46 AM (1,501 Views)
Tough times are ahead for the Australian economy over the next few years, says leading industry analyst and economic forecaster, BIS Shrapnel in its Long Term Forecast 2014-2029 report. This will also be the topic of discussion at the company’s forthcoming Business Forecasting Conferences in September.
According to the report, domestic demand in terms of local consumption and investment expenditure will experience its weakest four-year period since the early-1990s recession, averaging only two per cent per annum to 2017/18.
While strong mining production and exports will take total output or GDP to an average three per cent annually, with net exports contributing around one per cent to annual output growth on average, employment growth will act to stymie domestic demand.
Richard Robinson, senior economist at BIS Shrapnel warns that employment growth will be soft with only 668,000 jobs created over the next four years.
Robinson comments that it will be a slow and difficult transition from an economy driven by the huge resources construction boom, which largely underwrote Australia’s solid economic performance over the last decade. He notes that the high dollar has undermined the competitiveness of domestic trade-exposed industry, inducing structural change as the economy was tilted towards servicing high levels of mining investment.
The mining boom has now peaked, and its decline over the next four years will impact growth significantly, but will be somewhat offset by increased mining output and exports flowing from that boom.
According to Robinson, the economy awaits the next set of growth drivers to take over from mining investment; however they will be slow to come through. The rebalancing, the dismantling of the capacity to service high levels of minerals investment and redeploying resources to the non-mining sectors, and hence the reversing of high Australian dollar-induced structural change to more broadly-based growth, will take time.
A significant decline in the Australian dollar will trigger the next structural shift back towards balanced growth. BIS Shrapnel believes that the dollar is reasonably valued from the point of view of competitive domestic trade-exposed industry when it is valued at around US 75 cents. Robinson says it may take three to four years to get below US 80 cents. A high dollar undermines the strength of recovery in non-mining business investment and delays the next phase of growth.
Key findings from BIS Shrapnel’s Long Term Forecasts report
GDP growth will slow over the next 12 to 18 months and remain stuck in a 2.5 – 3 per cent band, well below its potential growth rate of 3.25 per cent with the stubbornly high dollar providing a major roadblock to reversing the process of structural change away from declining mining investment to more broadly based growth.
Domestic demand growth will remain just below 1.5 per cent in 2014/15, similar to 2013/14.
Though there are some signs of a pickup in non-mining business investment in the latest ABS capex surveys, these industries are coming off the bottom of the cycle after the post-GFC collapse. Tightening capacity and improved confidence will drive a recovery in non-mining business investment but this is at least 12 to 18 months away. Non-mining business investment has also been impacted by subdued household spending, attributed to the public reaction to the Abbott Government’s first budget which affected consumer confidence.
Real GDP growth in the short term will be driven by net exports and housing investment. Net exports are expected to add at least one per cent to growth over each of the next four years. The long-awaited recovery in dwelling investment is now entrenched with the expectation of low interest rates for an extended period, combined with a substantial deficiency of residential stock driving a solid increase in residential building.
Private non-dwelling building should also post moderate growth over the next few years with major projects in the retail, warehouses and accommodation sectors offset by declines after the current boom in hospital building.
The cumulative 40 per cent decline in resources investment over the next four years, coupled with a stalling in the upturn in dwelling and private non-dwelling building construction and only a moderate rise in public investment, will see total investment actually lower in 2017/18 than current levels, in real terms.
In other words, there will not be enough non-mining investment to replace the loss of mining investment over the next four years.
While GDP growth will look good, boosted by minerals production, the labour market will remain weak in the near-term. Loss of jobs associated with mining investment will keep employment growth subdued.
Households have built up a considerable savings buffer after several years of high savings rates. Though weak wages and employment growth are softening household income growth, the improved financial security will see consumer spending continue to pick up modestly over the next few years.
Strong growth is predicted to resume from later this decade, with GDP and domestic demand growth lifting to around 3.5 per cent in 2018/19 and strengthening through early next decade. A sub-US 80 cents dollar will be a key element of that stronger growth profile, with another round of mining projects, further public investment and renewed upturn in housing and non-dwelling building all contributing to this growth.
Next to Australia’s weak competitiveness profile, I would characterize its soaring housing market as the biggest concern.
I’m hardly an expert on macroprudential tools but they seem to be having some positive effects in New Zealand and are surely essential if Australia is to have any hope of tackling these two issues simultaneously. Lower LVRs, caps on debt-to-incomes, requirements for banks to hold substantially more capital against home loans, reform negative gearing. There are plenty of ways by which regulators can lean against housing without hiking interest rates.
You have to ask why we ought to be worried about rapid house price appreciation, and the answer must be the risk of a crash which leads to high unemployment. Well, if we jack up interest rates we’ll get high(er) unemployment, and high it will stay until interest rates are cut and/or the dollar falls. It strikes me as a less-bad alternative to try every means at our disposal to deflate housing without increasing interest rates, and only consider hiking if house prices are truly going berserk.
Of course, this somewhat academic now since we should have had various MP policies in place back when the RBA was pushing the real cash rate into negative territory. Then if we still found the housing market in its present frenzy, we could countenance higher interest rates as a last resort.
It's been a catch 22 the oz reliance on on the stir fry market for the oz commodities exports , yeah there's some good but it's killing manufacturing stuff & other sectors of the economy.
The good, bad & ugly I suppose.
Who wins regardless? I'm sure some can figure that out.
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$ It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do. Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
And yet house prices are going berserk - this can only end badly. Where are you Shadow with your house prices tracking incomes tune? I suppose incomes have risen 16 percent in Sydney in the last year despite poor growth? My understanding was incomes hVe nearly beaten inflation over the last 12 months.
And yet house prices are going berserk - this can only end badly. Where are you Shadow with your house prices tracking incomes tune? I suppose incomes have risen 16 percent in Sydney in the last year despite poor growth? My understanding was incomes hVe nearly beaten inflation over the last 12 months.
Sydney house prices are currently rising faster than incomes, but try not to forget that Sydney house prices fell from mid 2010 to mid 2012 while incomes kept rising.
Prices tracking incomes is something that happens over the long term. It doesn't mean that every single month prices and incomes rise by exactly the same amount.
Some years prices rise faster, some years incomes rise faster. The net result is that Sydney's house price to income ratio today is roughly the same as it was in 2003.
Sydney house prices are currently rising faster than incomes, but try not to forget that Sydney house prices fell from mid 2010 to mid 2012 while incomes kept rising.
Prices tracking incomes is something that happens over the long term. It doesn't mean that every single month prices and incomes rise by exactly the same amount.
Some years prices rise faster, some years incomes rise faster. The net result is that Sydney's house price to income ratio today is roughly the same as it was in 2003.
I find it incredible how many times you have had to repeat this very simple concept. You are very patient.
Talking to bears is teaching children. You need to repeat it multiple times before it sinks in.
I fully expect Gonzo to make the same error again in a week or two.
Too bad 2003 means nothing at all on the scale of things, it has no bearing whatsoever on the future. And more so with wages now dropping around the western world. Something that has never happened before.
I would say teaching bulls is like teaching children, they seem to have no concept of reality no matter how clearly you explain things.
Even tryimg to teach the so called expert bull children is an impossibility, as they discard all reality around them, even after things are clearly explained and the evidence is clear. See the impossibility below.
The net result is that Sydney's house price to income ratio today is roughly the same as it was in 2003.
So we have house to income ratios at 2003 levels? Wasn't that a high point? What makes you think we can bust through this previous high point (I think we can, due to low IRs)?
So we have house to income ratios at 2003 levels? Wasn't that a high point? What makes you think we can bust through this previous high point (I think we can, due to low IRs)?
Yes, interest rates are much lower than 2003, so affordability is better than it was then. Also we have the foreign buyers.
So the price/income ratio will probably exceed 2003 levels. But eventually interest rates will rise and the ratio will fall back again.
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