In Q4 2016, Australia’s ECR score dipped by 0.4 points, dropping two places to 12th in the country risk rankings. Political challenges, lower economic forecasts than expected and a fall in Australia’s debt indicator score all contributed to the decline. As the end of the first quarter of the year approaches, ECR asks two experts what lies in store for 2017.
Balancing act: Life has been a beach in Australia for decades, but the tide is
Warwick McKibbin, director of the Centre for Applied Macroeconomic Analysis, Australian National University
“The Australian economy has experienced over 25 years of sustained economic growth without a recession.
“While Australia rode the China boom during the first decade of this century, the weakening in commodity prices and the end of the mining investment boom in Australia has driven a significant adjustment towards a more balanced economy.
“Despite sustained growth, there are areas of vulnerability in the Australian economy which need to be addressed with policy adjustment.
“In the housing market, there is a potentially toxic combination of high house prices, low wage growth and high household debt. There is also badly needed federal government fiscal reform due to revenue shortfalls and lack of progress in cutting outlays. There are significant problems in the energy system because of a lack of a political consensus on climate and energy policy between the government and Opposition.
“In 2017, many of these vulnerabilities will be tested by the potential policies of the Trump administration in the US. It seems that Australian Opposition politicians have been happy to make short-term political hay out of a relatively sanguine domestic environment and blocked much needed reform.
“However, a severe economic shock from the global economy will lay bare the dangers of not addressing key vulnerabilities in the Australian economy.”
Riki Polygenis, head of Australian economics, National Australia Bank (NAB)
“Our [NAB economics] Australian ratings balance excellent scores for governance and institutional risk against some challenges on the economic front.
“A re-acceleration in house prices in Sydney and Melbourne has seen renewed emphasis on household balance sheets by the Reserve Bank of Australia (RBA) amidst a backdrop of already elevated levels of household debt and weak household income growth.
“We are not, however, forecasting a sharp increase in unemployment and/or interest rates, and as such do not envisage a material increase in mortgage delinquencies or defaults, although we note the reduced capacity of households to withstand future economic shocks.
“Recent comments from RBA officials raise the possibility that macro-prudential measures may be stepped up to slow the pace of credit growth. A further rate cut from the RBA also looks less likely given the RBA’s concerns, despite some concerns about economic growth into 2018 as liquefied natural gas (LNG) exports flatten off and dwelling construction starts to detract from growth.
“Australia’s current-account deficit has narrowed considerably thanks to rising resource exports – most recently LNG – as well as a recent surge in coal and iron-ore prices.
“These same forces are likely to see the current-account balance switch into surplus in Q1, despite some offset from a wider net income deficit. It is unlikely that a current-account surplus will last into 2018, however, given our forecasts for coal and iron-ore prices to retreat.
“Surging coal and iron-ore prices will also be a source of reprieve for government revenue in FY2016-17, although we expect this to provide only temporary relief. The government’s ability to address more intractable structural challenges is likely to remain low in the current parliament amidst little appetite for politically challenging reform.
“Our growth trajectory: GDP growth is expected to pick up quickly in year-ended terms to 3.25% by Q3 2017, easing slightly to just over 3% by Q4 2017. LNG exports will ramp up through the year, while domestic demand looks a little healthier as the drag from mining investment reduces and government investment has been revised upwards, given infrastructure and defence spending plans at the state and federal level.
“The outlook envisages modest household consumption growth amidst subdued household income growth, while non-mining business investment gradually strengthens through 2017 and 2018 – a more modest upswing than in historical investment cycles.
“Our forecasts do continue to envisage a slowdown in 2018, as dwelling construction begins to subtract from growth, while LNG exports flatten off and are no longer adding to growth.”
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.