What has the Australian economy got in store for 2015?

25th Feb , 2016

For the coming year Australia should look at its external environments and the possible impacts on our economies.

The World Environment

The world’s economic regions and 230 nations and sovereign states can be separated into old news and tomorrow’s future news. The old news are the EU, Japan and the USA which together had 55% of the worlds GDP in the late 1990s, that has fallen to 42% and falling fast.

• The EU countries are almost all deep in debt, taxed highly, working with excess’s rules and regulations, and nanny states.
• Japan’s a similar position and has the worst world debt at 250% of GDP. Japan’s recovery will be slow and has a long-term weak growth outlook.
•  The USA is much better prospects and will continue to gain momentum.

The Asian mega-region, which is Asia-Pacific less Japan plus the Indian sub-continent accounts for 35% of the world’s GDP and is growing three times as fast as the world at around 7%.

Australia is centred in the Asia-Pacific region were 80% of its trade takes place and two thirds of all its inbound tourism and immigration come from. This represents an upside from Australia, if it can lift its game and compete.

While Australia’s growth in 2015 is expected at about 3.3% slightly higher than 2014 and will come largely with Asia.

Polarisation

The outlook for the World’s top 20 nations with around 80% of the world’s GDP shows a great polarisation between old and the new economic zones.

Top Growths expected

China 7%, India 6.5% Indonesia 5.6% Turkey 3.7%, South Korea 3.7%, Mexico 3.6%, Poland 3.3%,

World averaged 3.3%.

Lowest Growths expected

Taiwan 3.2%, Australia 2.9%, USA 2.9%, UK 2.7%, Canada 2.5%, Spain 1.7%, Germany 1.5%, Brazil 1.4%, Japan 1.1%, France 0.8%, Iran 0.6%, Russia 0.6%, and Italy 0.5%.

Interest rates

Australian interest rates are expected to rise a little and Aussie exchange rates to weaken further then return to slightly higher levels against other main currencies particular the US dollar. With the US ending of quantitative easing this may have caused as yet unrealised inflation. Inflation itself may be tempting for governments with international debts who may look to bring back safer levels of debt to GDP i.e. under 65% instead of the current level of around hundred 115% of GDP as debt.

Australian Economy

Australian economy has been slowing in 2014 and the estimated GDP growth is 2.8% for the calendar year, but expected as slightly stronger in 2015 3.1%, but still below the long-term average of 3.5%.

The Australian economy is prone to recession after the end of each business cycle. And the next danger period is considered to be around 2017-18. These recessions usually occur due to a collapse in capital expenditure, not collapsing consumption expenditure or exports. Despite a collapse in investment in 2001 recession was avoided by boosting the housing sector the first home-buyers’ grants of $7,000 in 2000 then $14,000 in later years. No such incentives were needed in 2009 due to a significant backlog of mining investment plus a stimulus spending under the government. That stimulus spending may not have been necessary as households were at least $10,000 better off than the previous year due to the fall in mortgage rates from 9.25% 5.25% and a sharp fall in petrol prices. The real effect was a significant increase in the federal government’s deficits and cumulative debt.

The concern at the moment is the tailing off of mining investment however the federal government in particular is looking to fill that gap with large scale infrastructure spending. Mining has not been helped by the significantly lower resources prices with, for example, Iron ore dropping 50% in price this year alone. This will also drag the federal government’s revenue significantly lower and delay any improvements in the deficits that they have inherited, with no real ability to get cuts in expenditure through the upper house in Canberra.

However, it is unlikely that Australia will have recession in the next few years. Australia may also avoid the next expected downturn in 2018. If this can be avoided then Australia would have been recession-free from more than a quarter of a century

Inflation looks like it will stay between the federal bank guidelines and interest rates are likely to rise only marginally. Mortgage rates should begin to rise from the historically low levels at under 5% upwards to the longer-term average rate your 7.75% over the next 3 years.

Productivity is back above the long-term average of 1.7% with 2% in 2014 however in the not-for-profit sector which is more than 22% of the economy their productivity growth in five years 2014 was -0.4%. These not -for-profits sectors include education, health, public administration safety, utilities and public transport.

So what reforms do we need?

The first political hot potato is industrial relations reform.

The second is faster broadband which is vital for the digital era that we have entered.  Australia is well behind most OECD nations and many nations of the neighbouring Asia-Pacific.

Both of these reforms above are critical, as Australia is now part of the world’s fastest-growing region with the fastest modernising area in the most competitive region.

What are the fastest growing industries in 2015

The fastest-growing industries in Australia will be health, mining, professional technical services and finance and insurance.

What are the slowest growing industries in 2015

The slowest will be manufacturing, agriculture, utilities and media.

Job Growth

Jobs lost in the past five years were 146,000, whereas 944,000 new jobs were created which is six times as great.

Over the next five years we should expect this ratio of new jobs to increase compared to those lost.

The new jobs will be in the new age service industries, whereas the losses are expected to be manufacturing and mining and other agriculture.

Conclusion on Australian economy 2015

Good job growth plus infrastructure spending by federal government should help push the GDP growth and support employment. The weak Aussie dollar will help exports, but edging up interest rates will put a brake on investment. The lower oil prices will help at the petrol pump, but the improvements to productivity are badly needed particularly in the not-for-profit areas and a better platform for electronic and data speeds are needed to compete in our economic region.

DavidCartney@bigpond.com

December 2014