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Australia Country Risk Report Q1 2019

Australia Country Risk Report Q1 2019

We believe that growth is likely to ease over the medium term due to the following (1) Growing external headwinds from escalating global trade tensions, particularly that between the US and China, is likely to weigh on growth in the Chinese economy, which would in turn reduce demand for Australia's mineral and coal exports (2) High levels of household indebtedness This is likely to constrain growth in private consumption as the 'interest only' mortgage payments revert to 'interest and principal' payments, which will significantly raise the monthly repayment liability for households (3) Given that Australian banks rely heavily on external wholesale funding, rising global interest rates will put upward pressure on domestic lending rates as banks seek to maintain their interest margins even in the absence of a rate hike from the RBA This would raise the cost of borrowing for businesses and weigh on capital expenditure

Australia's real GDP growth accelerated to 3 4% y-o-y in Q218, from 3 2% y-o-y in the previous quarter, driven by strong growth in private and government consumption We forecast growth to come in at 3 0% in 2018, on the back of resilient domestic private consumption, supported by strong growth in job crea-tion and rising wages However, we expect growth to moderate to 2 5% in 2019, as export growth is likely to slow over the coming quarters as a result of China's economic rebalancing and escalating global trade tensions

The Reserve Bank of Australia (RBA) left its cash rate steady at 1 50% during its October 2 monetary policy meeting, extending its prolonged hold since September 2016, and we expect the central bank's stance to remain unchanged for the rest of 2018 However, a gradual decline in unemployment and rising inflation amid a positive growth outlook should see the RBA hike interest rates by 25bps to 1 75% in 2019

We forecast Australia's federal fiscal deficit as a share of GDP to come in at 0 5% in FY2018/19 and 0 4% in FY2019/20 (versus the government's estimate of 0 4% and a surplus of 0 2%, respectively), following the significant fiscal deficit improvement in FY2017/18 to 0 3%, from 2 0% in the previous year We believe that moderating economic growth, coupled with the government's planned personal income tax cuts, will likely see revenue collection disappoint amid growing healthcare and social security expenses

We are bearish on the Australian dollar over the near term due to a neutral RBA, growing US-Australia yield differentials, and global and political uncertainties However, we believe that the unit will stabilise over the longer term as we expect the RBA to turn hawkish in the latter half of 2019 which would support a nar-rowing of yield differentials with the US Furthermore, the currency's undervaluation should also support some AUD strength

The ruling Liberal- National coalition has most likely lost its parliamentary majority, following the Liberal Party's likely defeat at the Wentworth by-election on October 20 We do not expect a snap election to occur; the government has signalled as much and the opposition Labor Party is unlikely to be able to secure enough votes to pass a no-confidence motion against the government Regardless, we believe that the by-election result is negative for policy continuity over the coming months, with energy security and climate change likely becoming the main focus We are revising Australia's Short-Term Political Risk score down-wards to 74 0 (out of 100), from 74 8 previously


Executive Summary
Core Views
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
Australia's Economic Outperformance To Ease Through 2019
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORTS AND IMPORTS
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Monetary Policy
Reserve Bank Of Australia To Hike In 2019 As Inflation Rises
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Australia's Fiscal Surplus Goal Likely To Be Delayed On Revenue Misses
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
Australia Country Risk Q1 2019THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.ContentsCurrency Forecast
More Downside For The Australian Dollar
TABLE: CURRENCY FORECAST
10-Year Forecast
The Australian Economy To 2027
Three Major Headwinds To Growth
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
Australia's Liberal Party By-Election Upset Raising Political Uncertainty
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Three Key Challenges: Population, Climate Change, China
Operational Risk
Developed States
TABLE: LABOUR MARKET RISK INDEX
TABLE: LOGISTICS RISK INDEX
TABLE: CRIME AND SECURITY RISK INDEX
TABLE: TRADE AND INVESTMENT RISK INDEX
Global Macro Outlook
Inflation And Policy Risks Rising
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % Y-O-Y
Index Tables
TABLE: AUSTRALIA – MACROECONOMIC DATA & FORECASTS

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