Australia Country Risk Report

Providing comprehensive data and in-depth analysis of political, financial and economic risk.

Report includes: BMI's Core Views, 10-year Forecasts, BMI's Economic Risk Index, Political Stability and Risk Index, Long-term Political Outlook, Operational Risk Index, SWOT Analysis and Structural Economic Sections

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Australia Country Risk Report
Product Price
$1,195.00

Political Uncertainties To Act As Drag To Growth

Core Views

  • 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 2.7% over the past decade.

  • Australia's federal elections are widely expected to be held on July 2, and we believe that the lack of policy certainty, as the elections will be a close fight between the ruling Liberal-National coalition and the opposition Australian Labour Party (ALP), will be negative for investment and act as a drag on economic growth. In the event that the coalition secures a victory in the elections, the inability to reduce expenditures when revenue growth is weak will divert scarce resources from the productive sector of the economy and crowd out the private sector to the detriment of the business environment.

  • 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.

  • The Liberal-National coalition government led by Prime Minister Malcolm Turnbull presented its FY2016/17 (July-June) budget on May 3, and maintained its goal of a balanced budget by FY2020/21. We believe that the administration's target is ambitious, and 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. 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.

  • Following the Reserve Bank of Australia (RBA)'s 25bps cut to its cash rate to a fresh historical low of 1.75% at its May monetary policy statement, we forecast the central bank to reduce its benchmark policy rate by another 25bps to 1.50% in by the first quarter of 2017. The central bank will ease its monetary policy further 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 downgraded our 2016 and 2017 real GDP growth forecasts to 2.1% and 2.2%, respectively, (from 2.3% and 2.5% previously) as investment in the mining sector continues to contract, and this will be compounded by weakness in the housing market.

  • We revised our average 2016 Australian dollar forecast stronger to USD0.7300/AUD (versus USD0.7000/AUD previously) owing to the AUD's strength since the start of the year. However, we remain bearish on the currency over the medium-term as the country's still elevated indebtedness leaves the currency exposed to capital outflows amid an economy that is suffering from an unwinding investment boom and a correction in the property market.

  • We revised our FY2016/17 federal budget deficit forecast to 2.5% of GDP from 2.1% previously as the ruling Liberal-National coalition focuses on supporting economic growth, particularly as it announces new spending initiatives, hoping to return the coalition to power.

Key Risks

  • The key risk to Australia's economy comes from the potential bursting of the domestic property market boom, particularly as 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.

Macroeconomic Forecasts (Australia 2014-2017)
Indicator 2014 2015e 2016f 2017f
e/f= BMI estimate/ forecast. Source: BMI, National Sources
Real GDP growth, % y-o-y 2.6 2.5 2.1 2.2
Nominal GDP, USDbn 1,446.2 1,221.3 1,223.4 1,226.1
Consumer price inflation, % y-o-y, eop 1.7 1.7 1.0 2.0
Exchange rate AUD/USD, eop 1.22 1.37 1.37 1.47
Budget balance, % of GDP -2.8 -2.5 -2.5 -2.5
Current account balance, % of GDP -3.1 -4.6 -4.0 -3.4
Executive Summary
5
Core Views
5
Major Forecast Changes
5
Key Risks
5
Chapter 1: Economic Outlook
7
SWOT Analysis
7
BMI Economic Risk Index
7
Economic Growth Outlook
8
Below Trend Growth To Prompt Further Easing
8
GDP By Expenditure Outlook
9
TABLE: GDP GROWTH FORECASTS
10
TABLE: PRIVATE CONSUMPTION FORECASTS
10
TABLE: GOVERNMENT CONSUMPTION FORECASTS
10
TABLE: FIXED INVESTMENT FORECASTS
10
TABLE: NET EXPORTS FORECASTS
10
Currency Forecast
11
AUD: Bear Market Not Yet Over
11
TABLE: BMI CURRENCY FORECAST
11
Outlook On External Position
13
TABLE: MAIN EXPORT AND IMPORT PARTNERS
13
TABLE: MAIN EXPORTS AND IMPORTS
13
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
13
Monetary Policy
14
RBA To Ease As Housing Market Gives Way
14
Monetary Policy Framework
15
Fiscal And Public Debt Outlook
16
Fiscal Consolidation To Remain A Challenge
16
Structural Fiscal Position
18
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
18
Chapter 2: 10-Year Forecast
21
The Australian Economy To 2025
21
Four Major Headwinds To Growth
21
TABLE: LONG-TERM MACROECONOMIC FORECASTS
21
Chapter 3: Political Outlook
25
SWOT Analysis
25
BMI Political Risk Index
25
Domestic Politics
26
Lack Of Consensus To Perpetuate Policy Uncertainty
26
TABLE: POLITICAL OVERVIEW
26
Long-Term Political Outlook
28
Three Key Challenges: Population, Climate Change, China
28
Chapter 4: Operational Risk
31
SWOT Analysis
31
Operational Risk Index
31
Operational Risk
32
TABLE: DEVELOPED STATES - LABOUR MARKET RISK
32
TABLE: DEVELOPED STATES - LOGISTICS RISK
36
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK
38
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK
41
Chapter 5: BMI Global Macro Outlook
43
Global Macro Outlook
43
Downside Risks Gather Momentum
43
TABLE: GLOBAL ASSUMPTIONS
43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
45
TABLE: MACROECONOMIC DATA & FORECASTS
47

Assess your risk exposure in Australia with our 100% independent forecasts assessing the pace and stability of this key market. Backed by trusted data from BMI Research's 52 million data point economic forecast model, this report will allow you to measure political, economic, business environment and operational risks in Australia with confidence.

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