BAML: Australia will pass the Netherlands’ record for consecutive growth for a developed economy in 2017

Mark Geyer of the Panthers celebrates winning the 1991 NSWRL Grand Final. Photo by Patrick Riviere/Getty Images.

Earlier this year Australia chalked up its 100th consecutive quarter without experiencing a technical recession, defined as two consecutive quarters of negative economic growth.

While there’s now a risk that the economy may have contracted in the September quarter of this year based off early GDP inputs, to many, it seems almost inevitable that Australia will surpass the Netherlands’ modern day record for a developed economy not experiencing a recession in 2017.

That’s certainly the view expressed by Tony Morriss, Alexandra Veroude, Phear Sam and Adarsh Sinha, members of Bank of America-Merrill Lynch’s (BAML) Australasian economics team, who believe that its not a case of whether it will happen, but that it will.

“In 2017, Australia will surpass the Netherlands’ 25-year modern day record of consecutive growth in a developed economy, not bad for a small open economy and a high beta commodity exporter,” the quartet wrote in a research note released earlier this week.

However, while BAML thinks that Australia will break that record, it says that the are six obvious risks that Australia will have to navigate in 2017 to remain the “lucky country” in years ahead.

Here’s the list, according to BAML:

  • There are significant limitations to policy for the year ahead. The benefits of further monetary policy easing have diminished due to financial stability risks while the high level of debt means households would be vulnerable to higher rates. We see the RBA on hold and fiscal policy constrained.
  • Domestic economic conditions are likely to remain frail next year considering the state of the labour market. Currency appreciation would be detrimental to the trade-exposed sectors, which are key drivers of growth.
  • Inflation will remain low as spare capacity and dwelling completions weigh on domestic cost pressures. We do not see core inflation returning to the target band until 2018.
  • Navigating a new political landscape and Australia’s place in Asia: We downplay the threat of trade frictions in the near-term but the risk cannot be dismissed.
  • Will higher commodity prices be sustained? We have lifted some of our forecasts, but still expect lower prices next year as Chinese demand slows. Consequently, the benefit to government finances will fade.
  • The AAA rating is more of a political than economic concern. We are not convinced of the case for a credit downgrade. A fractured political backdrop and capital flows are more of a concern.

Based on those uncertainties, Morriss, Veroude, Sam and Sinha think that economic growth will slow in 2017, thanks largely to weakness in the domestic economy.

“We see a more modest path of household consumption growth in light of expectations that weak wages growth will persist,” they say.

“Outcomes in the labour market will be key to this outlook, with upside risk should the current trend of part-time concentrated employment revert back to full-time employment.”

Though a potential upside risk for household demand hence economic growth, they don’t see this occurring in the near term.

Helping to offset continued caution from the household sector, BAML suggests that a strong pipeline of dwelling investment and a reversal of the downtrend in business investment will help to underpin economic growth.

In unison with those developments, BAML says that much of the growth over the next two years will come from increased commodity exports.

“GDP is again expected to be dominated by external drivers as the economy enters the production phase of the mining boom,” says Morriss, Veroude, Sam and Sinha.

“Resource exports are expected to add 1.3ppts [percentage points] and 1.5ppts to GDP in 2017 and 2018, respectively, with growth shifting from iron ore and coal towards liquefied natural gas (LNG).”

In real terms, BAML expects real GDP to grow by 2.6% before accelerating to 3.2% in 2018.

In the year to June this year, the economy grew by 3.3%, the fastest pace seen in four years.

Elsewhere it sees the AUD/USD falling to 70 cents next year with “US dollar appreciation dominating the ongoing strength in commodity prices”, much like the trend that’s been seen in recent weeks.

As for interest rates, it says that short-term risks are “skewed towards the downside”. However, it adds the disclaimer that there’s a risk that the next move in rates is higher if “the AUD depreciates and global reflation gains traction to impact domestic price pressures”.

However, it says that risk is more likely over the medium-to-longer term, not in 2017.

Here’s BAML’s forecasts for GDP, domestic demand, CPI and the RBA cash rate over the next two years.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.