Australia

Towards a modest acceleration

Country Rating AA1

Strengths

  • Large natural resource endowments
  • Strong infrastructure and business environment
  • Proximity with Emerging Asia
  • Low public debt
  • Top toursitic destination 

    Weaknesses

    • Dependent on Chinese demand and commodity prices evolution
    • Highly vulnerable to change in climate
    • External vulnerabilities stem from chronic current account deficit and high external debt
    • High household debt (above 180% of disposable incomes)
       

      Economic Overview

       

      Dragged by bad weather…

      Bad weather conditions (Cyclone Debbie) put a drag on first-semester economic performance. Coal production and exports have been disrupted due to mines closures and damaged freight infrastructure. Tourism and agriculture have also been affected. 

       

      GDP growth is set to pick up speed in the remainder of the year. The policy mix will aim to boost economic growth with a loose stance on fiscal and monetary policy.  

      Public spending and investment are set to gather pace due to rebuilding efforts. Exports may accelerate at a gradual pace in line with improving global demand, stronger LNG exports capacity and a rebound in tourism. 
      The scale of acceleration will depend on household consumption. It is likely to be moderate due to high leverage (189% of disposable incomes) and modest growth in wages. Against this backdrop, we expect GDP growth to rise by a humble +2.3% in 2017 before accelerating to +2.6% in 2018.   

      The balance of risks has somewhat improved. Externally, global demand and commodity prices have gained some traction since last year. Domestically, high household’s debt and unbalanced property market pose significant risks.  

       

      Solid buffers provide leeway to support growth 

       

      The Reserve Bank of Australia is expected to stay on hold in 2017, maintaining its accommodative policy stance.
      First, inflation should remain in the target range of 2% to 3% on average in 2017. Second, the institution will likely wait for more tangible evidence of sustainable recovery before raising policy rates. These include growth acceleration from the second semester onwards and a signal of wage reflation. Post-2017, the likelihood of a rate hike will increase with stronger growth and higher inflation (2.5% on average). 

      On the fiscal side, the rate of consolidation will be lowered. Public finances are sound with low debt (43% of GDP) and lower deficit compared to other high-income economies. This provides some leeway to support growth. Potential supportive measures include a corporate tax cut, additional infrastructure spending, and more inclusive growth-supportive measures. 

       

      External vulnerabilities remain manageable

      The large current account deficit is expected to narrow gradually in the medium term (-1.5%  GDP in 2018) on the back of rising exports of services dedicated to wealthier Asian economies, improving goods exports as LNG exports capacity strengthen and commodities’ prices potentially maintain their recovery.
      At over 100% GDP, external debt remains a source of vulnerability. However, policy buffers such as low public debt, favorable investors’ confidence, and relatively positive economic outlook (compared to other high-income economies) provide some cushion.