Australia: Real GDP growth forecasted to remain at around 3% in 2016 and 2017 - NAB

Research Team at NAB, suggests that the real GDP growth in Australia is forecast to remain at around 3% in 2016 and 2017, above their estimates of long-run potential growth rate of around 2½%.

Key Quotes

“This will largely owe to surging LNG exports and strong growth in net services exports. Domestic demand growth will remain very weak at around 1% despite strong dwelling construction. This largely reflects sharply lower mining investment, although the outlook for non-mining investment growth is disappointingly modest. Household consumption growth is expected to remain at around 2½ to 2¾% p.a, somewhat below its historical average, amidst soft growth in household incomes (owing to subdued wages growth).

Looking into 2018 however, the real GDP outlook deteriorates, as LNG exports flatten off, the dwelling construction cycle turns down and the lagged benefit from the sharp currency depreciation since 2013 starts to wane. Even incorporating our latest forecast for two further rate cuts in May and August 2017, real GDP loses some momentum, easing to an average 2.6% in 2018, and the unemployment rate hovers at around 5¾%, a rate which indicates ongoing spare capacity in the labour market.

Within these aggregates, the Australian economy will continue to experience varying conditions across industries and geographies. New South Wales and Victoria will remain in the lead in coming years in terms of state final demand, and real gross state product growth will be neck and neck. Services activity (including but not limited to tourism and education exports) is clearly outperforming, while both states will continue to benefit from relatively strong population growth, high levels of housing construction, infrastructure expenditure and a modest pick up in wages. The challenge for both NSW and Victoria (like the national economy however) will be to sustain momentum as the impetus from the lower AUD and housing construction starts to tail off.

The combination of low commodity prices and lower mining investment is having a more pronounced impact on WA, the NT and parts of Queensland to differing degrees. The labour market adjustment in particular, and negative impact on labour incomes, will become more marked over coming years as another 50K jobs are lost, with flow on effects to consumer spending, business investment and government revenue in affected states. In terms of timing, the drag will come earlier in Queensland, where all three major LNG projects have started shipping or are due for completion in 2016.

Strength in tourism spending (both domestic and international) and education exports are likely to remain bright spots for most states and territories, including Queensland, Tasmania, SA and the larger states of NSW and Victoria.”