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Australia Business Forecast Report Q2 2014

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

Core Views

The Australian economy continues to struggle to stay above water, as domestic demand continues to show signs of weakening. We maintain 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 US$0.82/AUD by the end of the year. For one, the manufacturing sector continues to battle high costs and stiff competition from cheap imports. Secondly, the mining sector could face even greater stress as firms seek to re-evaluate their projects in light of a slowing Chinese economy and weak commodity prices. We believe that the housing market remains precarious, as affordability of homes continue to edge to new lows. Given our poor outlook for the Australian job market in 2014, in which we forecast unemployment to reach 6.5% by the end of the year, we believe that demand for housing will decline. The overextended household balance sheets further augur the growth in housing-related credit growth. In our opinion, the Australian banking sector is the sector most leveraged on the housing market and we expect that declines in house prices will adversely impact the industry.
The Liberal-National coalition’s popularity has been on the decline since winning the elections in September 2013. Its government remains hampered by a fragmented Senate, which threatens any reform push by the government. The government has also decided to push back the target date on its fiscal surplus, which is in line with our view. Given the federal government’s restrained policy-making ability, we believe the state government is likely to step up to the plate and push through reforms at the state level.
We maintain our forecast for the Reserve Bank of Australia (RBA) to hand out another 50 basis points worth of cuts in H214, bringing the cash rate to 2.00% by end-2014, even though the near-term economic outlook has improved. Indeed, we expect that a weak currency will only provide some reprieve against the mining sector slowdown while slow the hollowing of Australia’s manufacturing. Thus, we believe that central bank will continue to attempt to stave off a decline in credit growth by easy monetary conditions when price pressures ease.

Major Forecast Changes

We have dialled back our outlook for a fiscal surplus, expecting the government to only achieve a primary balance surplus in FY2020/21, versus our previous projections for a fiscal balance surplus. The Abbott government’s Direct Action plan – which will incentivise carbon abatement rather than penalise excess carbon emissions – is likely to cost the government more than the AUD1.55bn that has been set aside. While we believe that the lack of support from minority parties could help prevent the government from implementing new spending policies, we see greater risks from the lack of cutbacks planned. Hence we have revised down our fiscal outlook, expecting rehabilitation of public accounts to occur much further down the road. We have raised our medium-term outlook for Australia’s trade account, on the back of increased liquefied natural gas (LNG) processing capacity currently under construction. Given that gas exports could account for 15-20% of overall exports by 2017, we have revised our forecast to expect a sharper widening of the trade balance from 2015, and subsequently, a surplus in the current account by 2017. However, in the near term, we expect these projects to place pressure on import growth, hence resulting in a slower narrowing of the trade deficit over the 2014-2016 compared to our previous forecast.

Key Risks To Outlook

Policies implemented by major economies like Japan, China and the US will likely have a significant impact on Australia. For example, Japan’s policy direction on its use of nuclear power could have a drastic impact should it decide to turn its reactors back on. Should Japan, the US and/or China enact more stimulus as their economies lose traction in 2014, the rebalancing in Australia could be delayed as the Australian dollar could face appreciatory pressures while demand for Australia’s mineral exports remain supported. Australian banks continue to be highly exposed to the domestic housing market. Given its reliance on external markets for funding, the banks could face a liquidity crisis should external counterparts withhold funding due to the deterioration of its balance sheet as the housing market sours. In order to prevent financial panic, government intervention could be needed in this scenario, which could force the budget deficit into double-digit territory.

Table Of Contents

Australia Business Forecast Report Q2 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
Political Gridlock Could Cause Climate Change Policy Vacuum 8
The issue of climate change remains at the forefront of the political gridlock in the Australian Senate, and we believe that the ruling
Liberal-National coalition will eventually concede to business-led pressures and amend its Direct Action Policy.
Table: Political Overview 8
TABLE: Minority Parties and Independents Within The Australian Senate 9
Long-Term Political Outlook 10
Three Key Challenges: Population, Climate Change, China 10
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
Weak Job Market Print Suggests Further Slowdown Ahead 14
The greater-than-expected job loss print recorded in December 2013 is in line with our outlook for Australia's unemployment rate to
head higher in 2014.
Fiscal Policy 15
Weaker Federal Finances To Intensify Pressure On States 15
The lack of fiscal expenditure reforms in Australia continues to support our downbeat outlook for public finances.
Monetary Policy 17
Economic Deterioration To Reignite RBA's Easing Bias In H214 17
We maintain that the Reserve Bank of Australia (RBA) will return to its easing bias in H214 despite having held its key policy rate at an
all-time low of 2.50% in its February 4 meeting.
Balance of Payments 19
Trade Positives Insufficient To Support AUD In 2014 19
Reductions in capital imports by businesses in Australia have been a key driver underpinning the narrowing of the trade deficit, which
came in at AUD118mn in November in seasonally-adjusted terms.
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 expected to remain firm, averaging 2.8 % 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 in 2012-2016.
TABLE: Long-Term Macroeconomic Forecasts 23
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Trans Pacific Partnership: Conclusion To Remain Elusive In 2014 28
In line with our expectations, the group of 12 negotiating countries missed the 2013 deadline to reach a consensus on the draft outline
for the Trans-Pacific Partnership (TPP). We believe that negotiations in 2014 are unlikely to fare any better as non-goods clauses
remain the key stumbling block. Apart from domestic opposition in various countries, elections due at the end of 2014 for New Zealand
and the US are likely to reduce the amount of time available for negotiators. We maintain our expectations for a much smaller pact to be
concluded, and even then, believe that chances of a deal in 2014 are small.
Business Environment 29
Institutions 29
Table: BMI Business And Operation Risk Ratings 29
Table: BMI Legal Framework Rating 30
Infrastructure 31
Table: Labour Force Quality 31
Market Orientation 33
Table: Trade And Investment Ratings 33
TABLE: Top Export Destinations, 2002-2009 34
Operational Risk 35
Chapter 5: Key Sectors 37
Autos 37
TABLE: Automotive Sales, 2011-2017 38
TABLE: Autos Production, 2011-2017 39
TABLE: Autos Trade, 2011-2017 40
Food and Drink 41
TABLE: Food Consumption Indicators - Historical Data and Forecasts, 2013-2018 41
TABLE: Alcoholic Drinks Value/Volume Sales - Historical Data and Forecasts, 2013-2018 42
TABLE: Mass Grocery Retail Sales By Format - Historical Data and Forecasts, 2013-2018 43
Other Key Sectors 45
table: Telecoms Sector Key Indicators 45
table: Defence and Security Sector Key Indicators 45
table: Pharma Sector Key Indicators 45
table: Oil and Gas Sector Key Indicators 46
table: Infrastructure Sector Key Indicators 46
table: Freight Key Indicators 46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Fairly Benign Prognosis... With Risks 47
Table: Global Assumptions 47
Table: Developed States, Real GDP GrowtH, % 48
Table: Emerging Markets, Real GDP Growth, % 49

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