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Australia Country Risk Report 2016

  • February 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

Real GDP growth is highly likely to slow over the coming years owingto a number of factors: slowing growth in the working age population;a high share of government spending relative to GDP; and a reversalin the country's terms of trade; and the growing risk of deflation.These impediments will result in real GDP growth averaging 2.3%over the next decade, down from 2.9% over the past decade.The ruling Liberal-National coalition government's poor politicalfortunes are improving and gaining momentum, suggesting thatit will emerge victorious in the upcoming federal elections, whichmust be held by January 2017. The coalition's rise in popularitycame about after Malcolm Turnbull took over as Australia's PrimeMinister on September 15 2015, when he ousted Tony Abbott in asnap Liberal party leadership vote. Turnbull is clearly enjoying a'bounce', meaning that polls could still narrow.We remain bearish on the Australian dollar despite the large fall wehave already seen in the currency.

While valuations are no longera headwind to the currency, the trend remains very bearish. Weakeconomic growth owing to falling investment and correction in theproperty market amid elevated indebtedness does not bode well forthe AUD.Australia's fiscal accounts are unlikely to return to a surplus anytime soon, given downside risks to revenue collection and a lack ofexpenditure cutbacks. Total revenue collection will remain poor asthe economy continues to weaken, which will weigh heavily on taxreceipts. Meanwhile, objections to spending cuts from the public,opposition and crossbench senators as well as other state governmentsindicate that the Australian government will struggle to keepits expenses and borrowing on a sustainable trajectory. While thereis currently no danger of a fiscal crisis, our core view is that thisgrowing burden of the government will undermine the productivityof the private sector and take its toll on economic growth over themedium term.We expect the Reserve Bank of Australia (RBA) to cut its cash rateby 50bps to 1.50% in 2016 as overall economic growth deterioratesas the unwinding investment boom is compounded by a weakeninghousing market amid a subdued inflationary environment.Major Forecast ChangesWe maintain our major forecasts as highlighted in our previous Q116Country Risk Report and we highlight the key risks below.

Table Of Contents

Australia Country Risk Report 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Below Trend Growth To Prompt Further Easing8
Australia's Q315 38% seasonally adjusted annualised expansion in real GDP (versus 10% in Q215) is likely to be a one-off, and we
believe growth will deteriorate in 2016 as the unwinding investment boom is compounded by a weakening housing market While the
RBA is unlikely to cut interest rates for the time being due to the strong performance of the Australian economy, we maintain our view
that the cash rate will be lowered by 50bps to 150% by H116
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Currency Forecast 11
AUD: Bear Market Not Yet Over11
We expect the Australian dollar to weaken against the US dollar over the coming months, and we forecast the unit to average
USD06600/AUD in 2016 (versus USD07500/AUD in 2015) Falling real interest rate expectations amid weak economic activity due to
an unwinding investment boom and property market weakness, coupled with high levels of external indebtedness, will drive the AUD
lower
TABLE: BMI CURRENCY FORECAST11
Outlook On External Position 13
TABLE: MAIN EXPORT AND IMPORT PARTNERS13
TABLE: MAIN EXPORTS AND IMPORTS13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE13
Monetary Policy 14
RBA To Ease As Housing Market Gives Way14
The RBA kept its cash rate unchanged at 200% at its February 2 monetary policy meeting, but continued to leave the door open for
further easing Amid a low inflationary environment and growing downside risks to the Australian economy, particularly from the housing
market, we forecast the central bank will reduce its key policy rate by 50bps to 150% in 2016, and we expect the AUD to head lower
over the coming months, underperforming other commodity currencies
Monetary Policy Framework 15
Fiscal And Public Debt Outlook 16
Fiscal Consolidation To Remain A Challenge16
Fiscal consolidation will remain a challenge in Australia over the coming years owing to poor revenue collection and insufficient
expenditure cutbacks despite the federal government's strong commitment to achieve a budget surplus We are less optimistic than the
Australian Treasury, forecasting the federal budget deficit as a proportion of GDP to come in at 21% in FY2016/17 (as compared with
the government's forecast of 19%) Australia's government expenditure as a share of GDP is likely to remain elevated as the population
ages, in turn compromising long-term growth as the private sector is crowded out
Structural Fiscal Position 18
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES18
Chapter 2: 10-Year Forecast 21
The Australian Economy To 2025 21
Four Major Headwinds To Growth21
We forecast Australia's real GDP growth to average 23% per annum over the next decade, down from 29% over the past decade
as the combined headwinds of slowing population growth, greater government spending, declining terms of trade, and heightened
deflations risks weigh on economic activity
TABLE: LONG-TERM MACROECONOMIC FORECASTS21
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Domestic Politics 26
Lack Of Consensus To Perpetuate Policy Uncertainty26
The uncertainty in Australia's cost containment policy will continue, posing risks to the pharmaceutical and healthcare industry Despite
the need to control spending, there is a lack of political consensus among the leading political parties in the country on the strategy that
should be adopted This is further compounded by the local interest groups within the healthcare industry, which have been able to
shape policy decisions, including the backtracking of a general practitioner co-payment proposal in March 2015
TABLE: POLITICAL OVERVIEW26
Long-Term Political Outlook 28
Three Key Challenges: Population, Climate Change, China28
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 4: Operational Risk 31
SWOT Analysis 31
Operational Risk Index 31
Operational Risk 32
TABLE: DEVELOPED STATES - LABOUR MARKET RISK32
TABLE: DEVELOPED STATES - LOGISTICS RISK36
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK38
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK41
Chapter 5: BMI Global Macro Outlook 43
Global Macro Outlook 43
Downside Risks Gather Momentum43
TABLE: GLOBAL ASSUMPTIONS43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %44
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %45
TABLE: MACROECONOMIC DATA and FORECASTS47

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