Australia is currently undergoing a once in a lifetime economic transformation. Gone are the days of business investment, led by an unprecedented mining infrastructure boom, powering economic growth. Now the economy is looking for new sources of growth, and it’s making many people nervous. It’s currently below trend, and, in some people’s minds, likely to stay that way or worse.
A sharp slowdown in our largest trading partner, China, along with an aging workforce, heavy levels of private sector indebtedness and fiscal constraints on government led UBS this week to declare the sub-trend economic growth may now become the norm, rather than the exception, for the Australian economy.
While UBS have plenty on their side, the NAB’s economic team is taking a slightly more optimistic view, revising up their 2015/16 and 2016/17 GDP forecasts to 2.6% and 3.0% respectively today.
Alan Oster and Riki Polygenis, senior members of the bank’s economics team, have come up with this nifty chart, shown below, that reveals the chief drivers of Australian economic growth in recent years, along with their expectations for the years ahead.
Oster and Polygenis expect that an uplift in exports, along with modest assistance from household consumption, dwelling investment and government spending will be able to mitigate declining business capital expenditure in the years ahead.
Here’s their assessment:
Our forecast profile continues to envisage weak domestic demand, and a large contribution from net exports – mostly from resource exports (particularly LNG) as well as stronger tourism and other services exports in response to the weak AUD. Domestic demand meanwhile remains weak. The decline in mining investment is only about half way through, government spending will be limited given budgetary constraints and consumer spending is expected to growth at slightly below average (assuming a gradual decline in the household savings ratio).
We have included a somewhat weaker dwelling investment profile in 2016 and 2017, although this is mostly offset by slightly higher (though still weak) non-mining business investment given the gradual trend improvement in capacity utilisation.
While a more optimistic assessment than some, the NAB’s forecasts are similar to those currently offered by the RBA. It will be interesting to see what changes, if any, the RBA will make to its own growth and inflation forecasts in tomorrow’s quarterly statement on monetary policy.
It’s due out at 11.30am AEDT Friday and is almost certain to be market moving one-way-or another.
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