Overvalued Property Market The Largest Risk To Growth
Real GDP growth is highly likely to slow over the coming years owing to a number of factors: slowing growth in the working age population; a high share of government spending relative to GDP; and a reversal in the country's terms of trade; and the growing risk of deflation. These impediments will result in real GDP growth averaging 2.3% over the next decade, down from 2.9% over the past decade.
The ruling Liberal-National coalition government's poor political fortunes are improving and gaining momentum, suggesting that it will emerge victorious in the upcoming federal elections, which must be held by January 2017. The coalition's rise in popularity came about after Malcolm Turnbull took over as Australia's Prime Minister on September 15 2015, when he ousted Tony Abbott in a snap Liberal party leadership vote. Turnbull is clearly enjoying a 'bounce', meaning that polls could still narrow, but for now the coalition has the advantage.
We remain bearish on the Australian dollar despite the large fall we have already seen in the currency. While valuations are no longer a headwind to the currency, the trend remains very bearish. Weak economic growth owing to falling investment and correction in the property market amid elevated indebtedness does not bode well for the AUD.
Australia's fiscal accounts are unlikely to return to a surplus any time soon, given downside risks to revenue collection and a lack of expenditure cutbacks. Total revenue collection will remain poor as the economy continues to weaken, which will weigh heavily on tax receipts. Meanwhile, objections to spending cuts from the public, opposition and crossbench senators as well as other state governments indicate that the Australian government will struggle to keep its expenses and borrowing on a sustainable trajectory. While there is currently no danger of a fiscal crisis, our core view is that this growing burden of the government will undermine the productivity of the private sector and take its toll on economic growth over the medium term.
We expect the Reserve Bank of Australia (RBA) to cut its cash rate by 50bps to 1.50% in 2016 as overall economic growth deteriorates as the unwinding investment boom is compounded by a weakening housing market amid a subdued inflationary environment.
Major Forecast Changes
We maintained our major forecasts as highlighted in our previous Q116 Country Risk Report and we highlight the key risks to our outlook below.
The key risk to Australia's economy comes from the potential bursting of the domestic property market boom. While we would not suggest that the housing market is in a bubble, valuations are very stretched, and affordability is very low. Should we see prices begin to decline, the process could become self-reinforcing as banks tighten lending standards and default rates rise. Given the importance of the Australian housing market in increasing overall credit in the economy, declining house prices could usher in a period of intense deflation and deleveraging.
Additionally, should the Chinese economy experience a financial crisis over the coming years as the investment bubble bursts, this would have a highly negative impact on Australian mineral demand, further undermining the country's terms of trade.
|f= BMI forecast. Source: BMI, National Sources|
|Real GDP growth, % y-o-y||2.8||2.3||2.3||2.5|
|Nominal GDP, USDbn||1,441.8||1,247.4||1,140.4||1,115.7|
|Consumer price inflation, % y-o-y, eop||1.7||1.7||1.0||2.0|
|Exchange rate AUD/USD, eop||1.22||1.37||1.67||1.54|
|Budget balance, % of GDP||-2.8||-2.5||-2.3||-2.1|
|Current account balance, % of GDP||-3.1||-3.5||-3.1||-2.2|
The Australia Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Australia. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.
An influential new analysis of Australia's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).
- Forecast the pace and stability of Australia's economic and industry growth through end-2019.
- Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
- Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
- Contextualise Australia's country risks against regional peers using BMI's country comparative Risk Index system.
- Evaluate external threats to doing business in Australia, including currency volatility, the commodity price boom and protectionist policies.
BMI provides our fully independent 5-year forecasts for Australia through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.
Economic Outlook Contents
The Australia Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.
Key Areas Covered:
- Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
- BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.
- Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
- Balance of Payments - trade and investment, current and capital account.
- Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
- Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
- Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
- Foreign Direct Investment - approvals, inflows and climate.
- External Debt - debt profile (short and long-term plus public and private sector obligations).
- Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.
- Rely upon BMI's 100% independent forecast scenarios for Australia and underlying assumptions - we take no advertising and are privately-owned.
- Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Australia, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
- Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.
What are the political risks to doing business in Australia over the next 5-years?
BMI's Australia country Risk Index evaluates the short- and medium-term threats to political stability.
Political Outlook Contents
- SWOT Analysis for the Australia Market - Political Strengths, Weaknesses, Opportunities and Threats facing Australia.
- Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Australia's risk are compared with regional and global averages.
- Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
- Long-Term Political Outlook BMI examines the structural risks to the stability of Australia’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.
- Benchmark Australia's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
- Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
- Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.
What are the current operational risks and difficulties associated with doing business in Australia?
The Operational Risk section gives an evaluation of current risks and difficulties associated with operating in the market. It also provides a brief overview of the regional Operational Risk Index which benchmarks Australia against its neighbours.
Operational Risk Contents
The chapter provides a summary of the main threats in the country, within:
- Labour Market Risk (Education; Availability of Labour; and Labour Costs)
- Logistics Risk (Market Size and Utilities; Quality and Extent of the Transport Governance)
- Trade and Investment Risk (Economic Openness; Government Intervention; and Legal Risks)
- Crime and Security Risk (Crime; Terrorism; and Interstate Conflict risks).
Key Sector Outlook*
Which industry sectors in Australia will grow fastest, and where are the major investment opportunities in the market?
BMI identifies investment opportunities in Australia's high growth industries including automotives, defence & security, food & drink, freight transport, infrastructure, oil & gas, pharmaceuticals & healthcare and telecommunications & IT.
Key Areas Covered:
- Market Overview - Size and value of each industry, including recent sector developments and major industry key performance indicators (KPIs) that have impacted company performance.
- 5-year Industry Forecasts - Forecasts for each year over 2015-2019, using BMI's proprietary industry modelling technique, which incorporates key domestic and international indicators - including economic growth, interest rates, exchange rate outlook, commodity prices and demographic trends - to provide fully integrated forecasts across and within each industry.
- Demand- and Supply-Side Data/Forecasts - BMI's industry data covers both the output of each industry and the domestic demand, offering clear analysis of anticipated import/export trends, as well as capacity growth within each industry.
- Target strategic opportunities in high growth industries, which are benefiting from global mega trends, and thus offer strong investment and growth opportunities.
- Compare the growth path of different industries to identify which are best placed to benefit from domestic and international economic prospects, and which have historically suffered from volatile growth trends - a key indicator of future risks.
*Not all Country Reports contain the Key Sector Outlook chapter. Please enquire above for more information.