Home > Australian economy set for weakest period since 90s recession, BIS Shrapnel says

Australian economy set for weakest period since 90s recession, BIS Shrapnel says

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Tough times are ahead for the Australian economy over the next few years, says leading industry analyst and economic forecaster, BIS Shrapnel in its Long Term Forecast 2014-2029 report. This will also be the topic of discussion at the company’s forthcoming Business Forecasting Conferences in September.

According to the report, domestic demand in terms of local consumption and investment expenditure will experience its weakest four-year period since the early-1990s recession, averaging only two per cent per annum to 2017/18.

While strong mining production and exports will take total output or GDP to an average three per cent annually, with net exports contributing around one per cent to annual output growth on average, employment growth will act to stymie domestic demand.

Richard Robinson, senior economist at BIS Shrapnel warns that employment growth will be soft with only 668,000 jobs created over the next four years.

Robinson comments that it will be a slow and difficult transition from an economy driven by the huge resources construction boom, which largely underwrote Australia’s solid economic performance over the last decade. He notes that the high dollar has undermined the competitiveness of domestic trade-exposed industry, inducing structural change as the economy was tilted towards servicing high levels of mining investment.

The mining boom has now peaked, and its decline over the next four years will impact growth significantly, but will be somewhat offset by increased mining output and exports flowing from that boom.

According to Robinson, the economy awaits the next set of growth drivers to take over from mining investment; however they will be slow to come through. The rebalancing, the dismantling of the capacity to service high levels of minerals investment and redeploying resources to the non-mining sectors, and hence the reversing of high Australian dollar-induced structural change to more broadly-based growth, will take time.

A significant decline in the Australian dollar will trigger the next structural shift back towards balanced growth. BIS Shrapnel believes that the dollar is reasonably valued from the point of view of competitive domestic trade-exposed industry when it is valued at around US 75 cents. Robinson says it may take three to four years to get below US 80 cents. A high dollar undermines the strength of recovery in non-mining business investment and delays the next phase of growth.

Key findings from BIS Shrapnel’s Long Term Forecasts report

GDP growth will slow over the next 12 to 18 months and remain stuck in a 2.5 – 3 per cent band, well below its potential growth rate of 3.25 per cent with the stubbornly high dollar providing a major roadblock to reversing the process of structural change away from declining mining investment to more broadly based growth.

Domestic demand growth will remain just below 1.5 per cent in 2014/15, similar to 2013/14.

Though there are some signs of a pickup in non-mining business investment in the latest ABS capex surveys, these industries are coming off the bottom of the cycle after the post-GFC collapse. Tightening capacity and improved confidence will drive a recovery in non-mining business investment but this is at least 12 to 18 months away. Non-mining business investment has also been impacted by subdued household spending, attributed to the public reaction to the Abbott Government’s first budget which affected consumer confidence.

Real GDP growth in the short term will be driven by net exports and housing investment. Net exports are expected to add at least one per cent to growth over each of the next four years. The long-awaited recovery in dwelling investment is now entrenched with the expectation of low interest rates for an extended period, combined with a substantial deficiency of residential stock driving a solid increase in residential building.

Private non-dwelling building should also post moderate growth over the next few years with major projects in the retail, warehouses and accommodation sectors offset by declines after the current boom in hospital building.

The cumulative 40 per cent decline in resources investment over the next four years, coupled with a stalling in the upturn in dwelling and private non-dwelling building construction and only a moderate rise in public investment, will see total investment actually lower in 2017/18 than current levels, in real terms.

In other words, there will not be enough non-mining investment to replace the loss of mining investment over the next four years.

While GDP growth will look good, boosted by minerals production, the labour market will remain weak in the near-term. Loss of jobs associated with mining investment will keep employment growth subdued.

Households have built up a considerable savings buffer after several years of high savings rates. Though weak wages and employment growth are softening household income growth, the improved financial security will see consumer spending continue to pick up modestly over the next few years.

Strong growth is predicted to resume from later this decade, with GDP and domestic demand growth lifting to around 3.5 per cent in 2018/19 and strengthening through early next decade. A sub-US 80 cents dollar will be a key element of that stronger growth profile, with another round of mining projects, further public investment and renewed upturn in housing and non-dwelling building all contributing to this growth.

BIS Shrapnel’s Business Forecasting Conferences in September

BIS Shrapnel hosts forecasting conferences in each of the major capital cities twice a year, presenting and discussing the company’s outlook for the Australian economy and the building industry.

Dates and venues

Brisbane Tuesday September 9, 2014 – Stamford Plaza

Sydney Thursday September 11, 2014 – The Westin, Sydney

Melbourne Tuesday September 16, 2014 – Park Hyatt Melbourne

Adelaide Thursday September 18, 2014 – Intercontinental Hotel

Perth Friday September 19, 2014 – Hyatt Regency Hotel

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