Leading industry analyst and economic forecaster, BIS Shrapnel predicts
tough times for Australia’s economy over the next few years, with domestic demand
to experience its weakest four-year period since the early 1990s recession.
This is the key message from BIS Shrapnel’s Long Term Forecast
2014-2029 report and also the topic of discussion at the company’s
forthcoming Business Forecasting Conferences in September.
A possible recovery in non-mining business investment is being delayed
by the stubbornly high dollar, and there isn’t enough non-mining investment
growth to offset the falling mining investment over the next four years,
according to the report.
Domestic demand encompassing local consumption and investment
expenditure will average only two per cent per annum to 2017/18. Strong mining
production and exports will see total output or GDP averaging three per cent
annually, with net exports contributing around one per cent to annual output
growth on average; however, the soft employment growth will impact domestic
demand.
Richard Robinson, senior economist at BIS Shrapnel warns that only
668,000 jobs will be created over the next four years and will hardly make a
dent in unemployment numbers.
Robinson predicts that it will be a slow and difficult transition from
an economy driven by the huge resources construction boom, which largely
underwrote Australia’s solid economic performance over the last decade. Having
reached its peak, the boom will see a decline over the next four years,
negatively impacting growth, which will somewhat be offset by increased mining
output and exports flowing from that boom.
Robinson observes that the next growth drivers expected to take over
from mining investment will be slow to come through.
The Australian dollar will be the trigger for the next structural shift
back towards balanced growth, but requires a significant decline in value. BIS
Shrapnel believes that the dollar is reasonably valued from the point of view
of competitive domestic trade-exposed industry when it is valued at around US
75 cents. However, it may take years for the value to get to this point. BIS
Shrapnel forecasts that the dollar will decline, but that it will take three to
four years to get below US 80 cents.
BIS Shrapnel’s fear is that the dollar will remain too high for some
time, undermining the strength of recovery in non-mining business investment
and delaying the next phase of growth.
Key findings from BIS Shrapnel’s
Long Term Forecasts report:
GDP growth will slow over the next 12 to 18 months and remain stuck in a
2.5-3.0 per cent band, well below its potential growth rate of 3.25 per cent,
thanks to the stubbornly high dollar that poses a major roadblock to reversing
the process of structural change away from declining mining investment to more
broad-based growth.
Recovery in non-mining business investment will be driven by tightening
capacity as the dollar gradually falls, and improved confidence.
Public investment will continue to fall as governments focus on budgets.
There will be another year or so of declining activity before the next round of
projects boosts activity. Consumer confidence has been impacted by the public
reaction to the Abbott Government’s first budget, with muted household spending
likely to further delay non-mining business investment.
Exports and housing will be, in the meantime, the key drivers of growth.
The long-awaited recovery in dwelling investment, which was delayed due to weak
housing market sentiment and excessive caution by investors, is happening with the
expectation of low interest rates for an extended period, combined with a
substantial deficiency of residential stock, driving a solid increase in
dwellings building.
The private non-dwelling building sector is also expected to experience
moderate growth over the next few years with major projects in the retail,
warehouses and accommodation sectors offset by declines after the current boom
in hospital building.
The cumulative 40 per cent decline in resources investment over the next
four years, coupled with a stalling in the upturn in dwelling and private
non-dwelling building construction and only a moderate rise in public
investment, will see total investment actually lower in 2017/18 than current
levels, in real terms. This means, there will not be enough non-mining
investment to replace the loss of mining investment over the next four years.
While GDP growth will be boosted by minerals production, the labour market
will remain weak in the near-term due to loss of jobs associated with mining
investment. Hence, BIS Shrapnel expects interest rates to remain at current low
levels over 2014/15, with only modest rate rises in this next cycle.
Households have built up a considerable savings buffer after several
years of high savings rates. Though household income growth is impacted due to
weak wages and employment situation, improved financial security will see
consumer spending continue to pick up modestly over the next few years.
BIS Shrapnel’s report predicts strong growth will again resume later
this decade, with GDP and domestic demand growth lifting to around 3.5 per cent
in 2018/19 and strengthening through early next decade. A key element of the stronger
growth profile will be the Australian dollar valued below US 80 cents, with
another round of mining projects, further public investment and a renewed
upturn in housing and non-dwelling building all contributing to the growth
story.
BIS Shrapnel’s Business Forecasting
Conferences in September
BIS Shrapnel hosts forecasting conferences in each of the major capital
cities twice a year, presenting and discussing the company’s outlook for the
Australian economy and the building industry.
Dates and venues
Brisbane Tuesday September 9, 2014 – Stamford Plaza
Sydney Thursday September 11, 2014 – The Westin, Sydney
Melbourne Tuesday September 16, 2014 – Park Hyatt Melbourne
Adelaide Thursday September 18, 2014 – Intercontinental Hotel
Perth Friday September 19, 2014 – Hyatt Regency Hotel
