Australia Country Risk Report Q1 2017

NEW YORK, Nov. 23, 2016 /PRNewswire/ --

Core Views

Real GDP growth is highly likely to slow over the coming years owing to a number of factors: (1) slowing growth in the working age population; (2) a high share of government spending relative to GDP; (3) a reversal in the country's terms of trade; and (4) the growing risk of deflation. These impediments will result in real GDP growth averaging 2.3% over the next decade, down from 2.7% over the past decade. Australia's Liberal-National coalition formed the government for a second term, following the July 2 federal elections, but we believe that it will not be able to significantly improve the country's business environment and economic growth prospects over the coming years.

The coalition's expected lack of majority in the Senate suggests that risks of policies being delayed and diluted are high. Additionally, the coalition's narrow margin of victory against the opposition Australian Labour Party is a significant setback for Prime Minister Malcolm Turnbull, and there is an increasing possibility that his leadership position might be challenged, which would create further uncertainty for businesses. We remain bearish on the Australian dollar despite the large fall we have already seen in the currency. While valuations are no longer a headwind to the currency, the trend remains very bearish. Weak economic growth owing to falling investment and correction in the property market amid elevated indebtedness does not bode well for the AUD. Fiscal reforms in Australia, notably expenditure cuts, will likely be held back due to political gridlock, particularly in the Senate, and we believe that the government led by the Liberal-National coalition will be unable to return the federal budget to a balance by its target of FY2020/21 (July-June).

While there is currently no danger of a fiscal crisis, our core view is that this growing burden of the government will undermine the productivity of the private sector and take its toll on economic growth over the medium term. The RBA's decision to hold its cash rate at 1.50% for the second straight meeting in October was in line with our expectations. We believe that the central bank will keep its cash rate unchanged for the rest of 2016 as it chooses to assess the impact of the record low interest rate on the Australian economy. Nevertheless, we maintain our forecast for policymakers to cut its cash rate by 25bps to 1.25% by H117 as the weakening housing market will weigh on the economy and keep inflation below its medium-term target of 2.0-3.0%. Major Forecast Changes We have upgraded our 2016 and 2017 real GDP growth forecasts to 2.8% and 2.5% respectively (from 2.4% and 2.2% previously). Our upgrade is a reflection of Australia's stronger-than-expected real GDP expansion of 3.1% y-o-y in H116, rather than a change in our bearish outlook. Our 2017 real GDP growth forecast is still below Bloomberg consensus expectation of 2.9%.
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