Australia: Economic growth outlook slightly better in 2018 and 2019 – NAB

Analysts at NAB are gradually becoming more confident that infrastructure spending and non-mining business investment should help the Australian economy navigate the challenges of peaking LNG exports and dwelling construction.

Key Quotes

“While growth will slow after reaching a peak of 3.2% y/y in Mar-18, our forecasts for 2.4% y/y in Dec18 and 2.6% in Dec-19 are  in keeping with our estimates of potential growth for the Australian economy of ~2½%.”

“We now forecast economic growth of 2.9% in 2018 and 2.8% in 2019 (previously  2.9% and 2.6% respectively). This change owes to a stronger global growth outlook (assuming current financial market volatility does not extend too far and undermine the recovery), some delays in LNG exports hitting the market (especially after a disappointing Q4 2017), greater confidence in the outlook for business investment and employment (although the latter must slow from current rapid rates), and annual averaging effects from what is shaping up to have been a slightly disappointing Q4 2017 (our preliminary forecast is 0.7% q/q).”

“Tepid consumer spending (~55% of GDP) amidst low and only gradually rising wages growth however tempers the outlook, and is a key uncertainty for monetary policy. That said, growth is likely to exceed potential (~2.5% on our estimates) this year, which will continue to put downward pressure on the unemployment rate to just over 5% by end-18 and holding there in 2019.”

“Key components of our economic forecasts in 2018 are:

• Strong government investment as infrastructure spending picks up (3.8% real).
• Recovery in non-mining investment (5.0%, although less pronounced than in early upswings). This includes non-residential construction (both building and engineering construction, the latter reflecting spillover from government infrastructure investment).
• Dwelling construction continuing its gradual decline (-2.2%) but remaining relatively high in level terms.
• Modest household consumption growth (2.4%), with low wages growth holding back household income growth, notwithstanding further employment growth.
• A very gradual pickup in wages growth (2.1% for average earnings) and core inflation (2.0% y/y by year-end).
• Net exports adding approximately ¼ ppt per annum to economic growth.
• Employment growth slowing through the year but remaining strong and continuing to put downward pressure on the unemployment rate.
• The RBA hiking the cash rate by 25bp at its August and November  meetings, although the risk is now for a later move.”