Australia has been undergoing a once in a multi-generation economic transition since the beginning of the decade, with household spending, residential construction and the nation’s services sector tasked with helping to offset the negative economic effects of the unwinding mining infrastructure boom.
While it hasn’t been all smooth sailing over this period — a surprise 0.5% GDP contraction recorded in the September quarter last year is just one case in point — somewhat remarkably, the Australian economy has done alright, defying those who believed the collapse in mining infrastructure investment would lead to a certain recession.
Thanks to a swathe of rate cuts from the RBA since — which have had both negative and positive side effects depending on who you ask — the Australian dollar has done what it’s always done as a shock absorber for the economy, weakening enough to support the non-mining areas of the economy.
Well, mark this point in the economic history books. According to Paul Bloxham, chief Australia and New Zealand economist at HSBC, Australia’s economic rebalancing act is now almost complete, with a familiar friend set to support the economy yet again at a time when it is needed most.
Australia’s mineral wealth.
“The story is now changing,” said Bloxham in a note released on Tuesday.
“The rebalancing act is almost done and a tailwind has, finally, arrived. Commodity prices have picked up, which is set to lift export values, nominal income growth, corporate profits, tax revenues, wages growth and inflation.”
Bloxham’s optimistic view is centred around the outlook for Australia’s commodity exports, replacing the mining infrastructure investment splurge that previously drove economic growth in recent years.
“For nominal GDP, the major support is set to come from the combination of a continued ramp up in resource export volume and the recent rise in commodity prices,” he says.
“Taking current future market pricing for iron ore, coal and oil prices, it suggests a substantial boost to growth in export values over the coming quarters.”
Bloxham is forecasting that export volumes will grow by 8.9% this year, and a further and 9.1% in 2018, helping to support both real and nominal GDP as a consequence.
Given that the economic drag from falling mining investment looks set to dissipate by mid-2017 as major LNG projects move from the construction to production phase, Bloxham is optimistic on the outlook for the Australian economy with growth in commodity exports and ongoing strength in services likely to override an expected slowdown in residential construction.
“The levelling out in mining investment is set to coincide with the end of a residential apartment building boom,” he says.
“Real growth is also expected to continue to be supported by the services sectors, led by exports of tourism, education and business services.”
Along with an expected boost in infrastructure investment — largely from the public sector — Bloxham sees economic growth accelerating from 2.6% in 2016 to 3.2% in 2018, placing upward pressure on wages, inflation and interest rates.
Although underlying inflation is below the RBA’s 2-3% target band, we expect it to gradually climb in 2017. There is a strong positive correlation between commodity prices and local wages growth. As a result, we expect the RBA to keep its cash rate on hold at 1.50% through 2017 and we have hikes pencilled in for 2018.