Current Issue #488

2017 economic forecast: an unspectacular year

2017 economic forecast: an unspectacular year

For the Australian economy, 2017 looks like being more of the same – so good news, bad news and some news in between.

There will be significant divergences in economic performance from industry to industry, from state to state and region to region.

The headline issues for the economy in 2017 are likely to centre around real GDP growth in a 2.25 to 2.75 per cent range, inflation glued to 2 per cent and the unemployment rate flatlining around 5.5 to 6 per cent.

For the government, the budget deficit will remain wide in these circumstances and with the government throwing in the fiscal policy towel since Malcolm Turnbull became Prime Minister, budget repair, to the extent there is any, will be driven by good luck in the form of the recent upswing in commodity prices feeding into the economy and which will help to reduce the deficit a little.

The Reserve Bank will be pressured to cut interest rates again on the back of the suboptimal economic scorecard, and will probably do so when it gets more compelling evidence that house prices are softening and credit growth is falling. It may be thwarted from cutting rates if there is any unexpected lift in inflation or any positive surprises from the global economy.

The macroeconomic picture is a scenario that has been witnessed in Australia since the global economic crisis from 2008 to 2010. In broad terms, Australia is still an eternity from recession, but on the other hand it cannot get the upside traction to lock in an above-trend rate of growth which would have the desirable effect of lowering unemployment (and underemployment) and pushing inflation back to the target range.

The good economic news will come through further strong growth in export volumes and, for the first half of 2017, decent growth in dwelling investment. There is also likely to be a ramping up of public sector infrastructure spending which will be supportive of growth. This positive contribution could continue right through 2017 and into 2018.

Household spending growth is likely to remain sluggish, held back by ongoing weakness in wages and the skewing of job opportunities to part-time employment. In these circumstances, income growth will be lucky to keep up with inflation, which will limit the ability of consumers to lift their spending.

The area with the greatest uncertainty next year will be business investment. Further falls in mining investment are likely, but, given the free-fall in that area in recent years, the low point in the mining cycle is getting near. It is conceivable that by the end of 2017, mining investment will have reached the low point and will then move higher.

Non-mining investment, which has been a critical missing link in the quest for a strong economy in recent years, should present some upside. The building of office blocks, hotels and related infrastructure is likely to see a pick-up in capital expenditure, while development of university campuses to deal with the rapid growth in student numbers could also add to investment.

For housing, there are some dark clouds. There will be a further oversupply of apartments and some fatigue from investors who are dealing with rising vacancy rates and weak rental yields. While a proverbial housing ‘crash’ remains unlikely, there are likely to be pockets of price weakness, especially where the apartment oversupply is most apparent.

Th at said, any house price downturn is likely to be rather muted. Australia is still benefitting from favourable demographics. Every three years or so, there are an extra million people in Australia. These new Australians will need somewhere to live, and whether they rent or buy, excess supply will be mopped up in a relatively short time, especially if new construction starts to fall away, as seems likely.

The end point is that the economy is doing reasonably well, but is certainly not strong. There are a range of risks from the international economy but these are evenly balanced. It looks like another decent, but not spectacular, year for the economy in 2017.


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