Westpac says weak wage growth and high household debt will weigh on Australia's economy for years

VIKTOR DRACHEV/AFP/Getty Images
  • The RBA expects Australian economic growth to accelerate to above 3% over the next two years
  • Westpac doesn’t share that view, forecasting that it will stand at 2.5% over both years thanks largely to weakness in consumer spending
  • Australia’s Q4 2017 GDP report will be released in early March

Australian economic growth looks set to remain sluggish over the next two years, disappointing the likes of the Reserve Bank of Australia (RBA) and other more optimistic forecasters who think growth will accelerate to over 3%.

That’s the view of Westpac’s Australian economics team who have put together this nifty chart to show parts of the economy will drive and detract from GDP growth this year and next.

The red bars are the contribution to growth Westpac expects in 2018 with the grey bars underpinning its forecast for 2019.

Source: Westpac

“We expect annual real GDP growth to be 2.5% in December 2018 and December 2019, a little below trend which we judge to be 2.75%. This contrasts to the RBA’s expectation for growth to accelerate to be 3.25% in both years.”

“A solid ongoing boost to growth will come from non-residential construction, government spending and exports. However, we are less upbeat on the consumer, housing and equipment investment.”

Trend economic growth is regarded as a level where unemployment and inflation are stable. In Australia, most see this as sitting somewhere between 2.75% to 3% per annum.

In particular, Westpac expects household consumption to remain weak, an outcome that will make it hard to achieve trend growth or above given it accounts for just under 60% of the entire Australian economy.

“We expect consumer spending to be lacklustre at a time of persistent weak wages growth and high debt levels, and for the home building cycle to turn down following an extended strong upswing,” it says.

“Considerable slack remains in the labour market which, together with the cost control focus of businesses, will restrain wage growth prospects.”

The bank is also wary of a slowdown in China, something it says could reverse the recent improvement in national incomes as a result of higher commodity prices.

“Conditions in China, our number one trading partner, are cooling in response to tighter policy,” it says.

“This will dampen commodity prices and see national income growth slip below trend, in contrast to recent strength.”

Given that assessment, it helps explain why Westpac doesn’t see the RBA lifting interest rates until at least 2020.

Australia’s Q4 2017 GDP report will be released in early March.

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