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