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Australia Business Forecast Report Q4 2014

  • August 2014
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views
Economic activity in Australia shows signs of rebounding from its low in Q114, even as the pull-back in mining investment remains underway. The strong performance by Australian exports lifted Q114 real GDP growth to 1.1% quarter-on-quarter (q-o-q) in real and seasonally adjusted terms, and we have upgraded our 2014 growth forecast to 2.3% on the back of these figures. However, our growth forecast remains below consensus, given a dimming outlook for iron ore and coal. Meanwhile, other sectors are unable to pick-up the slack as narrowing profit margins dampen businesses' appetite to invest and hire. 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.

The Liberal-National coalition's popularity has been on the decline since winning parliamentary elections in September 2013. In addition, the government struggles to secure the support it needs in the Federal Senate where it does not hold a majority, and as such likely to dilute any reform efforts. With economic weakness to become more evident in Q414 and credit growth waning, we forecast the Reserve Bank of Australia (RBA) cut its benchmark interest rate by 25 basis points to bring the cash rate to 2.25% by end-2014. We expect easing house prices to support the RBA's rate cut decision. 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
Given strong export performance in Q114, we have upgraded our growth forecast, expecting 2014 real GDP growth to come in at 2.3%. While further export growth could present upside risks to our forecasts, our dimming outlook for iron ore and coal exports, alongside our expectations for reforms in China to affect demand for
these commodities, our core scenario is for the slowdown to remain in play in the Australian economy.

Table Of Contents

Australia Business Forecast Report Q4 2014
Executive Summary 5
Core Views...5
Major Forecast Changes.5
Key Risks To Outlook5
Chapter 1: Political Outlook.. 7
SWOT Analysis 7
BMI Political Risk Ratings.. 7
Domestic Politics. 8
Political Uncertainties To Stall Pro-Business Policies..8
Given that the opposition Australian Labor Party and Australian Greens are now less inclined to collaborate with the government, the
Liberal-National coalition's growing reliance on the unpredictable Palmer United Party has led us to downgrade Australia's short-term
political risk rating to 79.4 from 81.0. We have further pared back our expectations for the coalition government to enact improvements
to the business environment, given its diminished ability to implement policies.
Table: POLITICAL OVERVIEW8
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
Fading Exports To Unveil Subdued Domestic Demand...14
The strong performance by Australian exports lifted Q114 real GDP growth to 1.1% quarter-on-quarter (q-o-q) in real and seasonallyadjusted
terms, and we have upgraded our 2014 growth forecast to 2.3% on the back of these figures. However, our growth forecast
remains below consensus as an austere budget and easing mining investment intentions should keep domestic demand subdued.
Table: Economic Activity. 14
Fiscal Policy... 16
Fiscal Cutbacks Unlikely During Abbott's Term16
In line with our expectations for fiscal consolidation to remain a challenge in Australia, the federal government will continue to face
objections from the wider public and politicians to implement its proposed cutbacks. Moreover, with the state governments keen to mend
their balance sheets, fiscal reforms by the federal government appear unlikely, leading us to maintain our downbeat outlook, expecting
the federal budget deficit to remain at around 2.6% of GDP, compared to government forecasts of 1.6% of GDP.
Table: Fiscal Policy16
Monetary Policy . 18
The Reserve Bank of Australia (RBA) held its official cash rate steady at 2.50% in its July monetary policy meeting. We maintain that
further deterioration in economic activity and a slowdown in domestic credit growth, weighed down by lower iron and coal prices and
weakness in domestic house prices, will prompt the monetary authority to deliver another 25 basis points interest rate cut by end-2014.
Table: Monetary Policy..18
Exchange Rate Policy . 19
AUD: Renewed Weakness Likely19
We continue to see the Australian dollar heading lower in a choppy fashion on the back of our interest rate view, expecting the Reserve
Bank of Australia (RBA) to cut rates, something not priced in the markets. With net non-commercial positioning once again bullish, we
see scope for downside macroeconomic surprises to undermine the currency as interest rate cuts become more apparent. Support
comes in at USD0.9200/AUD, while a break of USD0.9400/AUD to the upside would set the stage for a run at USD0.9760/AUD.
Table: Current Account.20
Chapter 3: 10-Year Forecast 23
The Australian Economy To 2023... 23
Exports And Immigration Key For Long-Term Growth23
Australia's real GDP growth is expected to remain firm, averaging 2.7% in the 10-year period from 201 4 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
TABLE: ASIA - ANNUAL FDI INFLOWS....31
Market Orientation... 32
Table: Trade And Investment Ratings32
table: Top Export Destinations, 2002-2009..33
Operational Risk. 34
Chapter 5: Key Sectors... 37
Pharmaceuticals and Healthcare... 37
Table : Pharmaceutical Sales , 2010-2018..39
Table : Key Expe nditures And Savings Under The Healthcare Sect or (AUDmn). 40
Table : Pri vate Healthcare Expe nditure Tre nds , 2010-201841
Table : Gover nme nt Healthcare Expe nditure Tre nds , 2010-2018....41
Table : Healthcare Expe nditure Tre nds , 2010-2018.41
Table : Telec oms Sect or - Mobile - Hist orical Data and Forecasts . 42
Table : Telec oms Sect or - Wireli ne - Hist orical Data and Forecasts .. 43
Other Key Sectors... 45
Table: Oil and Gas Sector Key Indicators..45
Table: Defence and Security Sector Key Indicators45
Table: Infrastructure Sector Key Indicators..45
Table: Food and Drink Sector Key Indicators....46
Table: Autos Sector Key Indicators..46
Table : Freight Key Indicat ors 46
Chapter 6: BMI Global Assumptions. 47
Global Outlook.... 47
US Revision Drags Down Forecast.47
Table: Global Assumptions47
Table : Devel oped States , Real GDP Growt H, %..48
Table : BMI VERSUS BLOO MBERG CON SENSUS REAL GDP GROWTH FORECASTS, %.. 48
Table : Emergi ng Markets , Real GDP Growth , %.49

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