Goldman Sachs has upgraded its outlook for Australia

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Goldman Sachs thinks that Australia’s economy “has moved through an important transition point” that will lead to faster economic growth and a higher Australian dollar in the period ahead.

And it could see the RBA lift interest rates as soon as the second half of next year.

“We have upgraded our economic growth forecasts for Australia and now forecast economic growth will average 2.8% in 2017, 2.9% in 2018, 3.0% in 2019 and 3.3% in 2020,” said Tim Toohey, Andrew Boak and Bill Zu, Goldman’s Australian economics team.

“This represents a 40 percentage point (ppt) upgrade in 2017, a 10ppt upgrade in 2018 and a 50ppt upgrade in 2019.”

Reflective of stronger economic growth, Goldman also lifted its AUD/USD forecasts over the next three, six and 12 months to 78 cents, 77 cents and 75 cents respectively.

Previously it saw the Aussie trading at 75 cents, 73 cents and 72 cents over the same time horizon.

The factor underpinning the optimistic view is the recent price spike in Australia’s key commodity exports, creating what it calls a “sharp turn in Australia’s national income dynamic” that will “likely to set off a chain of events through the Australian economy in coming months”.

Bullish.

Here’s Toohey, Boak and Zu on why that bodes well for Australia’s economic rebalancing:

The resulting surge in national income should be reflected via much stronger mining profits, a large taxation windfall for the Federal government (and elimination of the threat of a sovereign downgrade), a restarting of idle capacity in the coal sector, a better climate for broader business investment and ultimately better employment and wage outcomes.

It also sows the seeds for a more material handover of the economic growth baton to the private sector, and importantly this transition can proceed despite our forecast of a sharp decline in new dwelling investment in 2017-18.

Perhaps the most dramatic transformation will come via Australia’s external accounts with a run of trade surpluses now in prospect for 2017 – indeed the combination stronger commodity prices and the ramp-up of LNG production suggests Australia will post the largest trade surpluses as a share of GDP during 2017 since any time since the early 1970s.

This, says Goldman, will not only help to boost economic growth and the level of the Australian dollar, but also increases the odds that the RBA will start to lift interest rates as soon as the second half of next year.

“The RBA’s focus has increasingly shifted under the stewardship of Governor Lowe towards minimising risks in the financial cycle rather than just the economic cycle,” says Toohey, Boak and Zu, acknowledging that “the RBA may begin to question the rationale for keeping official interest rates at a record low of 1.5%”.

“At this stage we have kept our forecast for the RBA to commence its hiking cycle in 1Q18 with the RBA forecast to increase interest rates 75bps through 2018 and a further 75bps spread over 2019 and 2020 to a 3.0% cash rate.

“Nevertheless, the risk of the RBA increasing the cash rate in 2H17 has risen materially and the evolution of financial conditions, house prices and underlying inflation will ultimately guide the decision.”

Here’s Goldman’s forecasts for real GDP growth, the AUD/USD and Australian CPI looking out to 2020:

They’re fairly optimistic forecasts, and the polar opposite to the view communicated by Macquarie Bank’s Australian economics team less than a week ago.

Instead of seeing faster growth and higher interest rates like Goldman next year, it believes the opposite outcome will occur in 2017: slower growth and further interest rate cuts from the RBA, thanks largely to heightened levels of business and consumer uncertainty following the US election result.

“Much will depend on the evolution of markets’ response to the surprise outcome, and the extent to which questions of ‘what now’ and ‘who’s next’ dampen confidence and induce a risk premium into decision-making by businesses and consumers,” said James McIntyre, Macquarie’s head of Australian economic research.

“Risks remain tilted to the downside, particularly on the inflation front, with the avoidance of downside risks dependent on the response of the AUD, and of policy makers (monetary, but especially fiscally).”

McIntyre sees Australian real GDP growth of just 2.1% in 2017. He also sees the RBA reducing interest rates to 1%, some 50 basis points below its present level.

One major investment bank thinks Australia’s economy will do swimmingly, the other that it’ll deteriorate sharply.

A more than appropriate reflection of the heightened levels of uncertainty that presently exist.

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