Australia Country Risk Report 2016
Real GDP growth is highly likely to slow over the coming years owingto a number of factors: slowing growth in the working age population;a high share of government spending relative to GDP; and a reversalin 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 politicalfortunes are improving and gaining momentum, suggesting thatit will emerge victorious in the upcoming federal elections, whichmust be held by January 2017. The coalition's rise in popularitycame about after Malcolm Turnbull took over as Australia's PrimeMinister on September 15 2015, when he ousted Tony Abbott in asnap Liberal party leadership vote. Turnbull is clearly enjoying a'bounce', meaning that polls could still narrow.
We remain bearish on the Australian dollar despite the large fall wehave already seen in the currency. While valuations are no longera headwind to the currency, the trend remains very bearish. Weakeconomic growth owing to falling investment and correction in theproperty market amid elevated indebtedness does not bode well forthe AUD.
Australia's fiscal accounts are unlikely to return to a surplus anytime soon, given downside risks to revenue collection and a lack ofexpenditure cutbacks. Total revenue collection will remain poor asthe economy continues to weaken, which will weigh heavily on taxreceipts. Meanwhile, objections to spending cuts from the public,opposition and crossbench senators as well as other state governmentsindicate that the Australian government will struggle to keepits expenses and borrowing on a sustainable trajectory. While thereis currently no danger of a fiscal crisis, our core view is that thisgrowing burden of the government will undermine the productivityof the private sector and take its toll on economic growth over themedium term.
We expect the Reserve Bank of Australia (RBA) to cut its cash rateby 50bps to 1.50% in 2016 as overall economic growth deterioratesas the unwinding investment boom is compounded by a weakeninghousing market amid a subdued inflationary environment.
Major Forecast Changes
We maintain our major forecasts as highlighted in our previous Q116Country Risk Report and we highlight the key risks below.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Below Trend Growth To Prompt Further Easing
- Australia's Q315 3.8% seasonally adjusted annualised expansion in real GDP (versus 1.0% in Q215) is likely to be a one-off, and we
- believe growth will deteriorate in 2016 as the unwinding investment boom is compounded by a weakening housing market. While the
- RBA is unlikely to cut interest rates for the time being due to the strong performance of the Australian economy, we maintain our view
- that the cash rate will be lowered by 50bps to 1.50% by H116.
- GDP By Expenditure Outlook
- TABLE: GDP GROWTH FORECASTS
- TABLE: PRIVATE CONSUMPTION FORECASTS
- TABLE: GOVERNMENT CONSUMPTION FORECASTS
- TABLE: FIXED INVESTMENT FORECASTS
- TABLE: NET EXPORTS FORECASTS
- Currency Forecast
- AUD: Bear Market Not Yet Over
- We expect the Australian dollar to weaken against the US dollar over the coming months, and we forecast the unit to average
- USD0.6600/AUD in 2016 (versus USD0.7500/AUD in 2015). Falling real interest rate expectations amid weak economic activity due to
- an unwinding investment boom and property market weakness, coupled with high levels of external indebtedness, will drive the AUD
- TABLE: BMI CURRENCY FORECAST
- Outlook On External Position
- TABLE: MAIN EXPORT AND IMPORT PARTNERS
- TABLE: MAIN EXPORTS AND IMPORTS
- TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
- Monetary Policy
- RBA To Ease As Housing Market Gives Way
- The RBA kept its cash rate unchanged at 2.00% at its February 2 monetary policy meeting, but continued to leave the door open for
- further easing. Amid a low inflationary environment and growing downside risks to the Australian economy, particularly from the housing
- market, we forecast the central bank will reduce its key policy rate by 50bps to 1.50% in 2016, and we expect the AUD to head lower
- over the coming months, underperforming other commodity currencies.
- Monetary Policy Framework
- Fiscal And Public Debt Outlook
- Fiscal Consolidation To Remain A Challenge
- Fiscal consolidation will remain a challenge in Australia over the coming years owing to poor revenue collection and insufficient
- expenditure cutbacks despite the federal government's strong commitment to achieve a budget surplus. We are less optimistic than the
- Australian Treasury, forecasting the federal budget deficit as a proportion of GDP to come in at 2.1% in FY2016/17 (as compared with
- the government's forecast of 1.9%). Australia's government expenditure as a share of GDP is likely to remain elevated as the population
- ages, in turn compromising long-term growth as the private sector is crowded out.
- Structural Fiscal Position
- TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
- Chapter 2: 10-Year Forecast
- The Australian Economy To 2025
- Four Major Headwinds To Growth
- We forecast Australia's real GDP growth to average 2.3% per annum over the next decade, down from 2.9% over the past decade
- as the combined headwinds of slowing population growth, greater government spending, declining terms of trade, and heightened
- deflations risks weigh on economic activity.
- TABLE: LONG-TERM MACROECONOMIC FORECASTS
- Chapter 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic Politics
- Lack Of Consensus To Perpetuate Policy Uncertainty
- The uncertainty in Australia's cost containment policy will continue, posing risks to the pharmaceutical and healthcare industry. Despite
- the need to control spending, there is a lack of political consensus among the leading political parties in the country on the strategy that
- should be adopted. This is further compounded by the local interest groups within the healthcare industry, which have been able to
- shape policy decisions, including the backtracking of a general practitioner co-payment proposal in March 2015.
- TABLE: POLITICAL OVERVIEW
- Long-Term Political Outlook
- Three Key Challenges: Population, Climate Change, China
- The Australian political scene is expected to remain stable over the coming decade, although it will still face a number of key challenges.
- The most salient are managing population growth, climate change and relations with China.
- Chapter 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- Operational Risk
- TABLE: DEVELOPED STATES – LABOUR MARKET RISK
- TABLE: DEVELOPED STATES – LOGISTICS RISK
- TABLE: DEVELOPED STATES – CRIME AND SECURITY RISK
- TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK
- Chapter 5: BMI Global Macro Outlook
- Global Macro Outlook
- Downside Risks Gather Momentum
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
- TABLE: MACROECONOMIC DATA & FORECASTS