Australia - The Outlook for 2017
Written and accurate as at: Dec 15, 2016 Current Stats & Facts
The Australian economy expanded at a moderate pace during the 2016 calendar year and much of the same seems to be the scene that is set for 2017.
Building, construction and property investment delivered strong growth which largely offset the significant decline which has continued to plague the mining industry. With mining investment now making up for only half of the economic contribution it made during 2008 it is without doubt the mining boom is all but over. It is expected that this is to further decline by more than another half over the next two years. With government investment being below the average trend and government debt being at record lows we expect an increase in expenditure will provide the necessary stimulus to support the Australian economy not go into recession but grow, albeit at below long term potential at around 2.1% during the 2017 calendar year (Reserve Bank of Australia and UBS is expecting 3% growth and the Commonwealth bank economists are predicting 2.8%)
It is worth noting that the Australian government is and has always been obsessed with a budget surplus whereas the US (who lost their AAA rating back in 2011) has never been fussed with a budget surplus. Interestingly the US stock market has doubled over the past 6 years whereas our market continues to trade significantly below the levels reached 9 years ago!
Wage Growth and underemployment
The number of people employed in Australia has progressively increased over the recent months with the unemployment rate being around 5.6%. While this figure may imply a strengthening labour market the broader indicators around employment in Australia suggest otherwise. This is largely due to a continued decrease in full-time employment and increase in part-time employment. This concept is often referred to underemployment. This is a large factor which is contributing to lack-lustre wage growth with salaries and wages remaining flat. Consequently, it would not be unreasonable to assume that price rises and underlying inflation will remain below the RBA target (2% - 3%) for some time.
Housing market
The housing market, particularly the construction of higher-density dwellings such as residential unit blocks, continues to grow at an above-market rate. While the pipeline of residential unit blocks is expected to continue the trend for some time, the rate of growth is expected to drop over the next two years with new construction completions outstripping population growth. This is a particularly rare conundrum as population growth has historically outpaced the growth in dwellings. This will likely see house price appreciation moderate from double digit levels to more sustainable returns.
Interest Rates
The economists at both the Commonwealth bank and Westpac expect interest rates to remain unchanged over the next 12 months. At least interest rates which are set by the RBA. Should Australia lose its AAA credit rating than it would be expected that the banks would increase their own interest rates citing an increase in the cost of funds. Interestingly, the economists at Ord Minnett are expecting interest rates to be cut by a further 0.5% during 2017, and they are not alone with the guys at Macquarie bank saying “ditto”. Their rationale being extremely low inflation.
Australian Dollar
The future value of the Australian dollar has proven been harder to pick than the winner of the Melbourne cup. The variance in expectations continues to be as far apart as the candidates in the recent US election. St George economists are predicting the Australian dollar to be US$0.76 by the end of 2017. They believe this will be due to stronger commodity prices, as do the economists at Macquarie. In contrast Morgan Stanley are predicting the Australian dollar to be US$0.63 due to stronger global growth, an increase in US interest rates and a final 0.25% rate cut. Westpac remains somewhere in the middle predicting the Australian dollar to be at around US$0.70 by the end of 2017.
Australian Share market
Investment bank Credit Suisse has forecast the Australian share market (as defined by the ASX200) will reach 6,000 points by the end of 2017. It cities that accelerated global growth, a recovery in profits, lower super contributions, reform in China and a regressed appetite for Australian bonds as the five contributing factors. Morgan Stanley on the other hand are expecting the index to be at 5450 by year end. The rationale being net 6% earnings growth which is in line with providing a 5% dividend without any capital growth. Macquarie bank is forecasting 10% earnings growth and has set a year end index target of 5875.
Who is right remains to be seen.