Australian economy to keep growing, but much depends on China

Australian economy to keep growing, but much depends on China

Fri, 12/10/2018 - 10:00
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Analysts expect Australia's long-running stretch of economic expansion to continue through 2020. Photo: Benjamin Sow

Australia's economy is forecast to grow solidly over the next couple of years on booming infrastructure spending and strong resource exports, though trade tensions and falling house prices are a clear hurdle ahead.

Economists polled by Reuters last week forecast Australia's $1.85 trillion of annual gross domestic product would expand 3.2 per cent in 2018, up from 2.9 per cent in a July poll.

The revision reflects a surprisingly strong first half as consumers, exporters and government all combined to lift annual growth to a six-year top of 3.4 per cent.

Expansion has been underpinned by brisk population growth of 1.6 per cent a year, twice the rich-world average, which in turn is driving spending on infrastructure.

Analysts forecast growth of 2.8 per cent in 2019 and 2.7 per cent in 2020, an outcome that would take Australia's stretch without a technical recession to a remarkable 29 years.

Much, however, depends on Beijing successfully navigating its trade conflict with the United States. China is Australia's biggest single export market and a key driver of prices for its many resources.

"Australia's exports are much more tied into China's domestic demand than its manufactured export supply chain," said HSBC's head of Australian economics, Paul Bloxham.

"We see commodity prices rising further from here as China boosts its infrastructure spending in response to rising trade barriers."

Just this week, the International Monetary Fund predicted growth of 3.2 per cent this year and 2.8 per cent in 2019 even while acknowledging the threat from global trade tensions.

Domestically a key risk is that falling property prices undermine household wealth and spending power at a time when wage growth is unusually subdued and debt at record highs.

"We have lowered our house price forecasts, but fundamentally are still forecasting a soft landing – with prices around 15-20 per cent above where they were three years ago," NAB chief economist Alan Oster said.

Crucially, the Reserve Bank of Australia is all too aware of the dangers in the housing market and has signalled its intention to keep interest rates at a record low of 1.5 percent for some time to come.

Fortunately, there is plenty of scope to stay accommodative as inflation remains well contained, having run below the RBA's 2-3 per cent target band for 10 straight quarters.

The latest poll showed analysts expected inflation of just 2.0 per cent for this year, before rising only modestly to 2.2 per cent for both 2019 and 2020.