The AMP’s Chief Economist, Dr Shane Oliver believes the Australian economy is set to grow by around 4% through this year, reflecting the lagged impact of monetary and fiscal stimulus, high levels of business and consumer confidence, the rebound in wealth and higher export prices.
He sees this possibly pushing unemployment back below 5% over the year ahead while the long term outlook for the Australian economy is also bright reflecting Australia’s exposure to high growth Asia, strong population growth, low public debt and a reasonably healthy financial sector.
While the worry list for the global outlook is still significant – Chinese tightening, high public debt levels, a shift towards populist policy making in the US, etc – there is plenty of reason for optimism concerning the outlook for Australia.
This is both in terms of the coming cyclical economic recovery and also from a longer term perspective.
From growth slowdown to growth rebound
After its worst slowdown since the early 1990s recession, Australia’s economy is set to rebound over the year ahead.
In 2009 the Australian economy is estimated to have grown by 0.9%.
This seems low but far better than expected a year ago, and significantly better than what occurred in other developed countries where GDP contracted 5% in Japan, 4% in Europe and the UK and 2.5% in the US.
Australia’s relative resilience is owed to a range of factors including tougher bank lending standards and a stronger financial system; a shortage of houses; the quick application of significant monetary and fiscal stimulus; the relative resilience of demand from China and a sharp fall at the height of the crisis in the value of the $A which acted as a shock absorber.
Over the year ahead Australia is likely to see a strong recovery in growth reflecting:
A rebound in housing construction activity – finance approvals for the construction of new dwellings and significant growth in building approvals point to a strong increase in housing construction this year.
While housing finance has recently dipped, it fell from a very high level and it is likely to remain strong on the back of the improving jobs market.
Housing starts this year are likely to be around 165,000 dwellings – up from 135,000 in 2009 but still well down from underlying demand which is now around 200,000 dwellings pa.
National income is likely to rise strongly supported by a 40% plus increase in prices for iron ore and coal (spot prices for iron ore would even suggest a 90% rise).
A solid turnaround in business investment – on the back of stronger profits which are expected to rise 20% this year, the recovery in business confidence from the 2008-09 slump and a large number of mega-projects particularly in the resources sector with the top ten projects alone having an estimated cost of $240bn.
Solid consumer spending – on the back of high levels of consumer confidence (see the previous chart), an improving labour market (with unemployment now back down to 5.3% and likely to fall below 5% over the next 12 months), more tax cuts from July (worth $5.80 a week for a worker on $80,000 and $13.50 a week for a worker on $120,000), the recovery in wealth over the last year thanks to higher house and share prices and still low interest rates.
While mortgage rates are on the rise, they are still low.
For example, a family with a $300,000 mortgage on the standard variable mortgage rate currently has an annual interest bill of $20,100 pa, but this is down from $28,800 in mid 2008.
Even if expectations for a 1% rise in interest rates by year end come to pass, this will still be relatively low at $23,400.
- Strong growth in public investment – as stimulus spending on infrastructure and schools flows through.
Our leading indicator for the Australian economy is pointing to growth of around 4% over the year ahead.
This has a number of implications:
- Interest rates have further to rise but with inflation likely to be around 2.5% by year end, thanks to the strong $A and spare capacity in the economy, the process is likely to be gradual taking the cash rate up another 1% or so;
- Unemployment is likely to fall back below 5%;
- The budget deficit is likely to improve faster than projected by the Government, as growth comes in faster boosting revenue and cutting spending.
The 2009-10 budget deficit is likely to be $20bn less than the November projection for a $57.7bn deficit, bringing forward the return to surplus to around 2013-14.
The lucky country rides again
At the end of the 1990s Australia was seen as an ’old economy‘, lacking much exposure to the ’new economy‘ driven by information technology.
Partly reflecting this, the Australian share market had been a relative underperformer versus global shares for the previous decade or so and the Australian dollar was sinking to new historic lows versus the $US.
By contrast, as we commence a new decade, Australia is looking a lot brighter.
This is reflected in a range of factors:
