Australia Country Risk Report Q2 2015
Real GDP growth is highly likely to slow over the coming yearsowing to a number of factors: slowing growth in the working agepopulation; an increasing share of government spending relative toGDP; and a reversal in the country's terms of trade; and the growingrisk of deflation. These impediments will result in real GDP growthaveraging 2.3% over the next decade, down from 2.9% over thepast decade.
Prime Minister Tony Abbott's leadership is looking increasinglyprecarious following the defeat of the Liberal National Party in theQueensland state elections. With approval ratings hitting new lows,the prospects of a turnaround look slim at present, and the LaborParty is in prime position ahead of next year's general election.
We remain bearish on the Australian dollar despite the large fall wehave already seen in the currency. The trend remains very bearish,valuations are still a headwind to the unit, and real interest rate differentialsno longer provide support to the currency.
The government's reform agenda is looking increasingly fragilefollowing the recent election defeat in the state of Queensland,where voters stiffly rejected large-scale privatisation plans. This putsprivatisation plans in other states in jeopardy, and suggests that theLabour Party is in prime position for a return to power in 2016, bothof which are a setback for the country's fiscal accounts.
Australia's current account picture is gradually improving in spite ofdeteriorating terms of trade, thanks to higher export volumes andlower income outflows. Going forward, we maintain that a currentaccount surplus is likely as the Australian dollar depreciates, butthis will increasingly be driven by lower imports, to the detriment ofthe domestic economy.
The Reserve Bank of Australia (RBA) decision to cut interest ratesto historic lows of 2.25% at its February meeting was in line withour view that the economy faces a growing risk of deflation. Fallingcommodity prices and renewed property market weakness are likelyto put upside pressure on real interest rates, potentially warrantingfurther easing.
Major Forecast Changes
We downgraded our outlook for interest rates in early January andforecast the RBA cash rate to come in at 2.25% by end-2015. Thecontinued build-up of deflationary pressure is putting upside pressureon real interest rates, and may even cause the central bank tocut rates further to 2.00% in H215.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks To Outlook
- Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic Politics
- Abbott Facing Major Test
- Prime Minister Tony Abbott's leadership is looking increasingly precarious following the defeat of the Liberal National Party in the
- Queensland state elections. With approval ratings hitting new lows, the prospects of a turnaround look slim at present, and the Labor
- Party is in prime position ahead of next year's general election.
- 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 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Activity
- GDP Print Highlights Growth Headwinds
- Australia's deteriorating terms of trade and unwinding investment boom are creating major obstacles to growth. The Q314 GDP miss
- supports our view that full-year real GDP growth will come in at 2.8%, below consensus expectations of 3.1%, before slowing further in
- 2015 to 2.3%. The growing importance of dwelling construction for growth will keep the Reserve Bank of Australia in a dovish mode.
- table: Economic Activity
- Fiscal Policy
- Fiscal Accounts Face Further Downside Risks
- The government's reform agenda is looking increasingly fragile following the recent election defeat in the state of Queensland, where
- voters stiffly rejected large-scale privatisation plans.
- table: Fiscal Policy
- Monetary Policy
- Rate Cutting Cycle Resumes As Expected
- The Reserve Bank of Australia decision to cut interest rates to historic lows of 2.25% at its February meeting was in line with our view
- that the economy faces a growing risk of deflation.
- table: Monetary Policy
- table: ASIA ASSET CLASS STRATEGY
- Exchange Rate Policy
- AUD: No Bottom In Sight
- We remain bearish on the Australian dollar despite the large fall we have already seen in the currency. The trend remains very bearish,
- valuations are still a headwind to the unit, and real interest rate differentials no longer provide support to the currency.
- Table: BMI CURRENCY FORECAST
- Table: Exchange Rate
- Balance Of Payment
- Current Account Deficit Narrowing To Continue
- Australia's current account picture is gradually improving in spite of deteriorating terms of trade, thanks to higher export volumes and
- lower income outflows. Going forward, we maintain that a current account surplus is likely as the Australian dollar depreciates, but this
- will increasingly be driven by lower imports, to the detriment of the domestic economy.
- Chapter 3: 10-Year Forecast
- The Australian Economy To 2024
- 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 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 & Investment Risk
- Chapter 5: Key Sectors
- table: Autos Total Market - Historical Data & Forecasts
- Food & Drink
- table: Food Consumption Indicators - Historical Data & Forecasts
- table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts
- Other Key Sectors
- Table: Oil & Gas Sector Key Indicators
- Table: Pharma Sector Key Indicators
- Table: Infrastructure Sector Key Indicators
- Table: Telecoms Sector Key Indicators
- Table: Defence and Security Sector Key Indicators
- Table: Freight Key Indicators
- Chapter 6: BMI Global Assumptions
- Global Outlook
- Weaker EMs To Weigh On Growth
- Table: Global Assumptions
- Table: Developed States, Real GDP GrowtH, %
- Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- Table: Emerging Markets, Real GDP Growth, %