Australia: Loss of momentum in 2018 - NAB

Research Team at NAB, suggests that the Australian economic outlook remains benign, with their real GDP forecasts broadly unchanged from last month at 3% for 2016, and easing modestly to 2.8% in 2017 and 2.6% in 2018.

Key Quotes

“The biggest forecast change relates to the settlement of a surprisingly high coking coal contract price for Q4 at $200/tonne s. This will add around 8% to the terms of trade in coming quarters, which if sustained would add 3.5bn to government revenue in the first year and another 9.1bn in the second year if sustained according to the Federal Treasury’s sensitivity analysis. The actual boost however is likely to be smaller, as we believe the recent surge reflects short-term supply constraints, including policy changes by China to curb its domestic coal production which will not continue given the detrimental impact of high coal prices on the steel industry.

Mining investment continues to fall of its “cliff”, with the adjustment now closer to ¾ complete. The associated declines in employment likely explain some of the weakening in trend employment growth in recent months, particularly in WA - more surprising has been a slowdown in employment growth in NSW. The slowdown employment growth, if it continues, does present some upside risk to our unemployment rate forecasts which for now remain in a band between 5½% and 5¾%.

Soft employment may also explain the weaker outcomes for retail business conditions in the NAB survey. Weaker profitability appears to be the major driver, although to the extent that it may reflect weaker demand from consumers, there may be some downside risk to our moderate forecasts for household consumption growth of 2¼-2½% in real terms in 2017 and 2018.

These forecasts are predicated on two further 25bp cuts to the cash rate in mid-2017to 1%. These will be in response to ongoing low inflation and a desire to prevent the unemployment rate from rising into 2018 as economic activity slows as support from LNG exports and dwelling construction taper off. Further out, there could be consideration of unconventional monetary policy tools. However other central banks are now more openly questioning the value of further monetary policy easing however, and expressing more concern about the risks, which may take some pressure off the RBA at least to the extent that further significant upward pressure on the AUD looks less likely from here on in. Indeed our forecasts remain for the AUD to slowly depreciate to 70 cents by end-2017 and a low of 68 cents in mid-2018.”