Friday, February 26, 2016

How Does the Australian Economy Look for 2016?

Sometimes, it's nice to blog on the more obscure things in life. Last week, the Australian Governor of the Federal Reserve of Australia, Glenn Stevens, addressed the Australian House of Representatives Committee on Economics. In his address, he summarized Australian economic development in 2015, and looked forward a bit. Although he did provide some insight on the global economy in general, I was hoping for something a little bit more substantive in his address. After all, Australia does have the world's 12th highest ranking GDP at $1.44T, according to the International Monetary Fund (IMF). How is the Australian economy expected to perform for the year 2016?

Australia is a country with superior credit ratings from Fitch, Moody's, and Standard and Poor's.
What is interesting is that whether you look at the economic freedom indices for either the Fraser Institute or Heritage Foundation, Australia has more economic freedom than the United States. As of date, Australia ranks 11th on the World Bank's Doing Ease of Business Index. With such good rankings, I would expect to find more good than bad on Australian economic outlook. Ultimately, the Australian economy is facing some challenges, but on the whole, is still doing well for itself. I highlight both the negative and positive aspects of the Australian economy below.

Negative Indicators
  • Mining Investment: Mining investment has taken a precipitous decline since 2013. In 2013, mining investment as a percent of GDP was 6.1 percent. Now, it's down to 1.7 percent.
  • Wage Price Index Growth and Balance of Trade: The Australian economy has experienced the largest shift in terms of trade in the past 150 years. The increase of supply of resource commodities has been accompanied by an even sharper decrease in prices. As such, wages have experienced weakened growth since 2010, and continue with that trend.
  • Housing: Housing prices have experienced quite the growth within the past few years.  They are so high that the International Monetary Fund wrote a report last year illustrating that point. While housing prices are expected to plateau, they are still very high.
  • Low credit growth: Overall credit only grew at a moderate 5.9 percent last June. Most of the increased credit-to-GDP ratio was due to weak nominal growth, instead of rapid credit growth. 
  • Goldman Sachs' Take: "We continue to be well below consensus for economic growth in 2016 and anticipate low interest rates for longer as the familiar threats of the commodity price income shock, rapidly falling business investment, and the challenge of addressing Australia's deteriorating fiscal position weight on economic growth." 

Positive Indicators
  • GDP Growth: Over the past 25 years, Australia's GDP has grown double than its peers, and technically, has not experienced a recession in that time period. GDP growth in Australia for 2015 was below historic averages, which is why it's nice to see Australia is expecting between a rate of 2.7 GDP growth and 3.0 percent growth for 2016. Goldman Sachs, on the other hand, has a bearish prediction of 2.0 percent since it will take some time for the non-mining sectors to adjust. 
  • Fiscal Position: Australia has a net debt of 15 percent, which is much lower than the G20 average of 79 percent.
  • Employment Growth and Unemployment Rate: Australia has experienced employment growth since 2013. The unemployment rate was about 5.75 in late 2015. Employment-to-population ratio has also taken an upward trend since late 2014
  • Depreciation of currency: Depreciation has led to competitiveness of Australian goods in the global market. 
  • Consumer Confidence: According to Roy Morgan Research, consumer confidence will be on an upward tick due to less volatility in the global markets. 
  • Merrill Lynch's Take: "It is our expectation that global volatility should pass and commodity prices stabilize. Should this occur, the case for further cuts [in interest rates] will be eroded significantly." 

For more reading, check out the following sources:
Reserve Bank of Australia, Statement on Monetary Policy (February 2016)

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