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Australia Country Risk Report Q2 2015

Australia Country Risk Report Q2 2015

Core Views

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
Automotives
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, %

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