Q&A: What's in store for Australia's economy as 2016 kicks off?
We sat down with Economist Robert Hill to find out more about the outlook for the Australian economy in 2016. Here’s his view on what’s in store for Australia.
Question: What’s the outlook for Australia’s economy this year?
Answer: Overshadowing Australia’s outlook is global commodity prices, which are inextricably linked to demand from China. The MYEFO revision surely took the effects from China’s slowdown into account, which has largely been responsible for the 10% downgrade to government receipts in 2015–2016.
Unemployment is decreasing, alongside an increasing employment rate. This is certainly positive news, however, when one takes a look at the data, some questions arise. This increasing participation rate is almost solely due to more women entering the work force. This is of course a good sign, however, it may not lead to an increase in wages, as due to certain workplace barriers, women are often underemployed or paid less than their male counterparts. Furthermore, the underutilization rate remained roughly steady in 2015, and has not followed a downward trend like the unemployment rate. These factors suggest that although unemployment is falling, a rise in wages may not be just around the corner.
Business investment has plummeted, and has been particularly impactful in regions such as Western Australia and Queensland. As these regions lose jobs, some workers will move to bigger South Western cities looking for work. This has already been observed as mining states have seen as decline in population growth since the peak of the mining boom. The catch is that wages will not shift equally into the cities. Mining is a capital-intensive sector, and an extra worker hour in mining produces more output than an extra hour in the household service sector. This is another reason why even though employment looks to be improving slightly, increased wages and consumption may not follow suit.
A reduction is unemployment is good news on a number of levels, including social cohesion etc. However, from a growth perspective, higher employment generally translates into increased income from higher wages as demand for labor grows. This propels consumer demand, and boosts economic growth. However if the increase in wages is limited, the effects of the decreased employment on growth may be somewhat muted. Also, wages tend to rise alongside increase in expectations of inflation, which are currently relatively subdued.
Q: What is FocusEconomics’ outlook for the Australian economy in 2016?
A: There is no doubt that China, Australia’s largest trading partner, will present some headwinds to growth for Australia. However, things could be worse. The AUD is likely to remain at its depreciated level over 2016, which will keep Australian exporters competitive even as global demand in 2016 falls.
At home, the country is continuing along its path towards rebalancing growth. The services sector is likely to continue its momentum and expand over the next year. According to the Reserve Bank of Australia (RBA), 2014/15 was the first period in six years in which the service exports contributed more to growth than iron ore exports. Business and consumer surveys have indicated an improvement in household and business services, which indicate that this field could become even more important in the coming year. The sharp decline in mining investment has impacted business services, and this impact will continue to be observable as data for 2015 rolls in. However, the non-mining service sector will also be supported by the RBA’s accommodative monetary policy well into 2016, as the RBA does not appear to be in a hurry to tighten its policy stance.
The rebalancing process may be underway, however it does not yet appear commensurate with the decline in the resource sector, and has hence resulted in the recent downward revisions to growth. The Focus Economics Consensus Forecast panelists expect GDP growth to accelerate from an estimated 2.3% in 2015 to 2.6% in 2016 and 2.9% in 2017.
Q: What direction are iron ore prices likely to go?
A: China’s appetite for steal is has driven iron prices in the past, however as the expansion of Chinese urban areas slows, so too does the demand for steel and its iron ore precursor. The spot price for iron has fallen to historical lows in the beginning of December, marking an almost 40% decrease since December last year, a spectacular fall even relative to most other commodities such as benchmark crude prices. Even if, as some analyst predict, prices rally, iron is highly unlikely to recover but a fraction of the losses incurred since last year.
Q: What’s the outlook for the mining industry in 2016?
A: The good news is, because large scale mining extractions projects have drawn to completion, Australia has recently expanded its iron production capacity, and is able to produce iron, and other resources at a relatively low costs. Although the terms of trade has fallen, export volumes have not. This has given Australia a chance to capture more of the global market share for iron. This should prolong the lifespan of low cost mining operations in Australia, and provide some back up for the transitioning economy. The bad news is that this is not likely sustainable to the same extent over the long term. Aussie mining companies have suffered drastic market decapitalization in 2015 and investors in the sector have been shaken.
Q: Could continued slumping ore prices affect Australia’s credit ratings?
A: As commodity prices are expected to remain low, major mining companies will likely refrain from further investment in the Australian outback, or even begin to divest. The waning importance of the mining sector however will likely not be drastic enough to jeopardize Australia’s AAA credit rating, as thanks to the government’s commitment to fiscal consolidation, and strong growth in the service sector, government finances will not be drastically impacted.
Q: How will the weakening Aussie Dollar affect the country's economy?
A: The AUD has fallen almost 12% year to date, and although this may seem significant by Australian standards, it’s a smaller decline that other resource intensive advanced economies such as Canada and Norway, indicating a relative unresponsiveness of the AUD to commodity markets and monetary policy expectations in the U.S. This also suggests that the AUD will remain at its current level for some time. This could give Australian exporters the confidence to count on an Australia price advantage well into the coming year, and may even pave the way for increased business investment. This could conflate with increased export volumes to provide a sizable boost to GDP growth in the coming year.
The weak AUD will likely have a more immediate impact on exports, as well as property markets. Tourism, and other service exports have already picked up this year, and manufacturers will likely also see a break in 2016. The timing and magnitude of the fed’s second rate hike will test global currencies, including the AUD, and although strong fundamentals should keep the AUD from experiencing extreme volatility, some downward pressure is to be expected if the Fed moves according to, or quicker than, its proscribed path of rate increases.
Q: Apart from the commodities sector, what's the outlook for other economic sectors and how will those affect the country's growth in 2016?
A: Indicators of Business confidence have come in strong recently, and according the monthly business sentiment index published by the National Australia Bank, business conditions have been above their long run average for the past year, and look to remain strong going forward thanks to moderate inflation, loose monetary policy and a boost to exporters from the low AUD. Business confidence however has not responded to these improved conditions as of yet. This is likely due to uncertainties surrounding global macroeconomic events, not domestic concerns, and should abate as business begin to take advantage of the accommodative conditions.
As mentioned earlier, the last year was the first in several years in which the service sector contributed more to growth the mining sector. We can expect this to also be the case next looking ahead as the sector grows quicker than the economy as a whole. China is slowing, however it is still one of the fast growing countries in the world, and a burgeoning Chinese middle class will look to Australia as a picturesque holiday destination, or as a place to send their children to university. Such factors will provide support to growth and are part of the reason growth is expected to pick up over the course of the next two years.
Q: Does Australia have any good strategies for diversifying the economy?
A: In December, Prime Minister Turnbull announced the country’s National Innovation and Science agenda, as an answer to slowing worker productivity and relative lack of research and development (RND) spending, and research collaboration in comparison to other OECD nations. This agenda includes a new entrepreneur class visa, tax breaks for investors, changes to bankruptcy laws, and a reduction in capital gains taxes for startups. These measures should work to diversify the economy in the future, and help to pivot away from resource intensive growth.
At this early stage, it is difficult to quantify what impact this agenda will have on growth, or on economic diversification. Critics point out that this agenda is too little too late, in the sense that it is long overdue and does little more than to help Australia catch up to the rest of the world, as opposed to making it a global leader in RND. Indeed, placing too much emphasis on startup is risky, as it is notoriously difficult to predict which will succeed, and generally, only relatively few will take off. Nonetheless, the New Prime minister has signaled that he is aware of Australia’s shortcomings in this field, and is taking the initiative, particularly in comparison to his predecessor who, pushed ahead with expansions in the mining sector as late as mid-year 2015.
Date: January 10, 2016
TagsTurkey Forex Australia Consensus Forecast Sub-Saharan Africa UK Major Economies Investment United States Emerging Markets Precious Metals Commodities Company News Tunisia Germany India Italy Banking Sector Commodities Housing Market South Africa Economic Growth (GDP) OPEC Gold Mexico precious metals MENA Africa Spain Argentina Iran IMF Venezuela Agricultural Commodities Colombia United Kingdom Portugal Ukraine Unemployment rate Greece Japan Base Metals Commodities G7 Trade Russia Euro Area USA oil prices Healthcare European Union Cryptocurrency Vietnam France Latin America Exchange Rate Energy Commodities China Inflation Oil TPP Infographic Brexit Brazil Eurozone Bitcoin Asia Eastern Europe Nordic Economies Canada
50 minutes ago
On 16 February, Nigerians will head to the polls to elect their next president. Economist Javier Colato details the… https://t.co/SrXTmy1LdO
16 hours ago
Energy prices are seen rising 1.7% in Q4 2019 compared to the same period of 2018 (last month: -3.2% year-on-year).… https://t.co/aoRwKyioCT
17 hours ago
Agricultural prices are projected to increase 5.6% year-on-year in Q4 2019 (last month: +10.5% yoy). Read more: https://t.co/OcVLmUvPVc
19 hours ago
Don't miss this preview of our latest Consensus Forecast report for Mexico. Download the full report here:… https://t.co/aHHDW1UOkG
19 hours ago
- Canada in 2019: Interview with a Top Economic Forecaster
- Pound Sterling 2019 Exchange Rate: Projections from Leading Analysts
- Expectations for Latin America’s Economy in 2019
- Ethiopia and Rwanda: From Destruction to Development
- Key commodities trends to look out for in 2019
- What drove Gulf neighbors to bail out Bahrain?
- The Four Financial Bubbles and Their Impact on the U.S. Economy
- The Poorest Countries in the World
- Italy: The sick man of Europe
- What does Bolsonaro's presidential win mean for Brazil's economic outlook?
- The World's Top 10 Largest Economies
- In Latin America, taxpayers are tapped to shoulder the burden of a bank bailout
- How and when will the next financial crisis happen? - 26 experts weigh in
- China and Africa: A partnership under the spotlight
- The conditions are ripe for a Global Financial Crisis 2.0
- Uncertainty, instability and fear haunt a generation of Argentinians
- 5 things: What to expect for Mexico's economy in 2019
- 5 things: Brazil's economic downturn and what to expect going forward
- Emerging Market Currency Crisis: Everything you need to know
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Venezuela's Electoral Conundrum
- Gold: The Most Precious of Metals (Part 3)
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit