Australia: Growth rate likely be anchored below trend in 2018 and 2019 – Westpac

Bill Evans, Research Analyst at Westpac, suggests that Australia’s growth rate is likely be anchored below trend in both 2018 (2.7%) and slowing to 2.5% in 2019 in contrast to official forecasts (Reserve Bank and Treasury) which anticipate growth picking up to 3.25% in both 2018 and 2019.

Key Quotes

“We have recognised a solid ongoing boost to growth from non-residential construction; government investment (especially at the state level) and exports. However we are much more cautious than official forecasts on the consumer; residential construction and equipment investment.”

“Slowing household incomes

Signals from the December quarter national accounts are more encouraging for the official view. Household spending has been revised up from an expected 2.1% to 2.9% following the release of the December quarter national accounts.”

“Business investment

New business investment lifted by 5.8% over the past year, a sharp turnaround from a 6.2% decline over 2016. Over the year, infrastructure work fell 1.2%; non-residential building advanced 12.3% and equipment investment spending increased by 8.4%.”

“Housing downturn

Dwelling investment contracted in 2017 by 5.8%. Based on the downturn in the trend in high rise approvals and a flat outlook for detached housing, we expect this downturn has further to run with the contraction accelerating into 2019.”

“Inflation below target

Inflation is also likely to remain benign holding a little below the bottom of the Reserve Bank’s 2-3% target band. In this regard we are in broad agreement with the Reserve Bank which is forecasting that underlying inflation will hold at around 2.0% in 2018 and 2019.”

“Interest rate outlook

Throughout 2017 and 2018 we have been of the view that the official cash rate will remain on hold in both 2018 and 2019.”

“These forces are likely to weigh on iron ore and coking coal prices. Some lift in supply from Australian producers is also expected to lower prices. These atmospherics for commodity prices along with the widening interest rate differential; and more appetite for the USD in an uncertain world are eventually expected to weigh on the AUD. We target AUD at USD 0.74 by end 2018 and 0.70 by 2019.”