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Australia Business Forecast Report Q3 2014

  • May 2014
  • -
  • Business Monitor International
  • -
  • 48 pages

Core Views

Economic activity in Australia remains weak, with the performance indices for manufacturing, services and construction all showing signs of further contraction. The pull-back in mining investment, as a result of a dimming outlook for iron ore and coal, continues to drive this dynamic. Meanwhile, other sectors are unable to pick-up the slack as narrowing profit margins dampen businesses' appetite to invest and hire. These trends fuel our downbeat outlook for the economy and the currency, projecting GDP growth to come in at 2.0% for 2014 and the currency to weaken to USD0.8200/AUD by the end of the year.

We believe that the housing market remains precarious, as housing affordability continues to edge to new lows. Our downbeat outlook for the Australian job market, which leads us to forecast unemployment to edge up to 6.5% by the end-2014, would inevitably weigh on the demand for credit and by extension, house prices. Indeed, major
Australian banks have expressed caution towards the domestic housing market during their H114 earning announcements. The Liberal-National coalition's popularity has been on the decline since winning the elections in September 2013. In addition, the government needs to secure support from several minority parties or even the opposition Australian Labor party (ALP), which could dilute any reform efforts from the government. In particular, we highlight a possible policy vacuum with regards to how the country will reduce its carbon emissions, as the coalition continues to push for its alternative scheme, Direct Action, and the repeal of the carbon tax.

With economic weakness to become more evident in H214, we forecast the Reserve Bank of Australia (RBA) cut its by 25 basis points to bring the cash rate to 2.00% by end-2014. This should weaken the Australian dollar in aid of local manufacturers, as the unit has remained quite strong on the back of market expectations of possible interest rate hikes.

Major Forecast Changes

We have pared back our expectations for monetary policy easing from the central bank, as the rising house and tradable goods prices have stoked inflationary pressures in the economy. However, given that we continue to expect macroeconomic indicators to worsen in H214, and eventually adversely impacting household balance sheets, we now forecast the RBA to deliver one 25 basis points interest rate cut, which will bringing the cash rate to 2.25%.

Table Of Contents

Australia Business Forecast Report Q3 2014
Executive Summary . 5
Core Views 5
Major Forecast Changes ..5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis .. 7
BMI Political Risk Ratings .. 7
Domestic Politics . 8
Opposition ALP's Support To Reduce Chances For An Early Election .8
The fragmented make-up of the Australian senate will continue to weigh on the Liberal-National coalition government's ability to push
through policies, especially given the differing viewpoints within the Palmer United Party. That said, we note that changes within the
main opposition Australian Labor Party (ALP) suggest that the ALP could provide the needed support to the Liberal-National coalition on
certain issues, which should help temper rising short-term political risks as well as the chances for an early election.
Long-Term Political Outlook . 9
Three Key Challenges: Population, Climate Change, China .9
The Australian political scene is expected to remain stable over the coming decade, although it will still face a number of key challenges.
The most salient are managing population growth, climate change and relations with China.
Chapter 2: Economic Outlook . 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity . 14
Mining Investment Pull-Back Remains A Drag 14
Even with investment in residential and public infrastructure ramping up, the Australian economy continues to struggle to offset the drag
from the ongoing pull-back in mining investment. The m anufacturing and services sectors are unlikely to provide a significant boost, as
they also face profit margin pressures, which will weigh on businesses' appetite to hire and invest.
TABLE: Economic Activity .14
Fiscal Policy .. 16
Infrastructure Push To Aggravate Fiscal Deficits .16
We believe Australia's fiscal deficit will continue to grow and hit a high of AUD51.5bn (3.0% of GDP) in FY2015/16 (July-June) as
alternative financing plans for the government's infrastructure projects are likely to prove insufficient. Moreover, substantial political
obstacles will prevent the current federal government from implementing any tax and expenditure reforms needed to improve the short
and long-term outlook of the country's finances.
TABLE: Fiscal Policy ..16
Monetary Policy .. 17
Ongoing Structural Change Supports Our Dovish Rate Outlook 17
We maintain our dovish outlook on Australian rates, and forecast the Reserve Bank of Australia to cut its policy rate by 25 basis points
(bps) by end-2014 to 2.25%, despite signs that a near-term pick-up could be on hand. While there has been a slight bounce in both
sentiment and data, we believe that the slowdown in investment in the mining sector is still at play, and do not expect the stronger
building activity in residential housing to prove sufficient to avert a slowdown in economic growth.
TABLE: Upcoming Australian State Elections 17
TABLE: Monetary Policy 18
Balance Of Payments .. 19
Downbeat Outlook For Steel To Cap Iron Ore Export Growth ..19
We believe that the sharp increase in Australian exports in January, which grew by 23.5% y-o-y, will not persist throughout 2014 given
our view for iron ore exports to see slower growth.
TABLE: Current Account ..20
Chapter 3: 10-Year Forecast . 23
The Australian Economy To 2023 23
Exports And Immigration Key For Long-term Growth 23
Australia's real GDP growth is expect ed to remain firm, averaging 2.7% in the 10-year period from 2014 to 2023. In particular, we
believe commodity exports and a renewed interest in skilled immigration will be key drivers in helping the economy return to its trendline
growth of around 3.0% from 2017 onwards, following a slowdown over 2013-2016.
TABLE: Long-Term Macroeconomic Forecasts .23
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings .. 27
Business Environment Outlook 28
Institutions . 28
Table: BMI Business And Operation Risk Ratings 28
Table: BMI Legal Framework Rating .29
Infrastructure 30
Table: Labour Force Quality ..30
Market Orientation . 32
Table: Trade And Investment Ratings 32
table: Top Export Destinations, 2002-2009 .33
Operational Risk . 34
Chapter 5: Key Sectors 37
Defence 37
TABLE: Defence Expenditure, 2011-2018 ..38
Freight Transport 41
TABLE: Road Freight ..42
TABLE: Rail Freight .42
TABLE: Air Freight 43
TABLE: Maritime Freight .43
Other Key Sectors . 45
table: Oil and Gas Sector Key Indicators .45
table: Infrastructure Sector Key Indicators 45
table: Telecoms Sector Key Indicators .45
table: Food and Drink Sector Key Indicators ..46
table: Autos Sector Key Indicators ..46
table: Pharma Sector Key Indicators ..46
Chapter 6: BMI Global Assumptions .. 47
Global Outlook . 47
Growth Increasingly Polarised ..47
Table: Global Assumptions ..47
Table: Developed States, Real GDP GrowtH, % 48
Table: Emerging Markets, Real GDP Growth, % ..49

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