Economists at Bank of America Merrill Lynch expect 2015 will be another year of below-trend growth in the Australian economy.
More than one-third of the expected 2.6% growth in real GDP in 2015 is expected to come from a 7.75% rise in the volume of resources exports as LNG shipments from Queensland start up and iron ore and coal exports continue to increase.
However, these exports will be at lower prices and much of the income will flow overseas.
And there’s little prospect of much employment being generated from these exports, according to Bank of America Merrill Lynch.
Saul Eslake and the team at the bank have produced their annual outlook for the Australian economy and have put this into a list of ten themes.
Here they are:
Global exposure. A stronger US economy and a stronger US dollar will contribute to more declines in the Australian dollar. A slowing China, and falling inflation globally, will add to downward pressure on the prices for Australia’s key commodities. However, cheaper oil is a positive for the Australian economy because Australia is a net importer of crude oil. On the other side, lower prices for natural gas will impact Australian exports and make it unlikely of further expansion in the LNG industry.
Weak income growth. Australia’s terms of trade will deteriorate further, by about 6% in 2015. Each shipload of iron ore is worth less and less as prices fall. In the early 2000s a ship load of iron ore was worth the same as 2,200 flat screen TVs, in 2011 about 38,000 TVs and now is worth about 17,000.
End of the resources boom. The transition in the resources sector from investment to exports which has been underway since 2012 will intensify as LNG plants which have been under construction begin to come on-stream. Four out of seven LNG plans under construction will start operating in 2015. It’s also likely that existing mining operations will be looking to cut costs.
More downside for the A$. The Australian dollar will likely continue to decline against the US dollar. This will provide additional impetus to economic activity but it may take longer to have its full effect than expected. Demand for the Australian dollar declines as capital inflows into mining investments fade. Bank of America Merrill Lynch forex strategists predict the Australian dollar at 77 US cents by the end of 2015.
A housing boom, of sorts. New dwelling construction activity is expected to reach a record high, although its rate of growth will slow, as will the rate of increase in property prices. Bank of America Merrill Lynch sees 200,000 new dwellings started in 2015. It would take five years of this peak activity to get anywhere near filling the current housing shortage.
Still cautious consumers. Growth in consumer spending will remain sluggish, reflecting very weak growth in household disposable incomes, a reluctance to add further to high levels of household debt, and ongoing concerns about rising unemployment. Bank Of America Merrill Lynch forecasts consumer spending will grow by 3%.
Non-mining capex turning. Some tentative indications of a pick-up in capital spending in some areas of the non-mining economy which could also help with an eventual improvement in job creation. Bank Of America Merrill Lynch says businesses have been increasingly disappointed with the performance of the Coalition government. This has fed through into declining confidence. However, actual business conditions, rather than confidence, have improved. There are indications of stronger capex and hiring in labour-intensive sectors such as construction, transport, recreation and finance.
Labour market still soft. Unemployment will likely continue to edge higher through most of 2015 as new job creation continues to fail to keep pace with the number of new entrants to the labour force. The unemployment rate will continue to erratically drift higher, peaking at 6.5% to 6.75%.
The fiscal challenge. Fiscal policy will remain a focus for the Abbott Government as it struggles to get the budget back onto a credible path out of deficit and back to surplus. Bank Of America Merrill Lynch: “How successful it is in that regard will also determine how willing it is to seek a mandate for more wide ranging economic reforms at the 2016 election.”
What does the RBA do? The RBA is likely to hold interest rates unchanged at 2.5% and start raising rates in 2016 despite the shift in market expectations towards the end of last year in favour of further rate cuts. Bank Of America Merrill Lynch: “The next movement in the RBA’s cash rate will be upwards, albeit not until the first half of 2016.”