Australian economy set for steady growth, barring trade shock

Australian economy set for steady growth, barring trade shock

Fri, 20/04/2018 - 13:58

Australia's total pipeline of construction projects totals more than $587 billion, according to Westpac. Photo: Jamie Street

Australia may extend its remarkable recession-free run out to 2020 as government and firms invest to cater for a rapidly-growing population, though trade tensions abroad have emerged as a new threat to the export-sensitive nation.

Economists polled by Reuters over the past week forecast Australia's $1.8 trillion of annual gross domestic product would grow 2.7 percent in 2018, down a tick from January's poll.

The median call was for growth of 2.8 percent in 2019 and 2.7 percent in 2020, an outcome that would take Australia's stretch without a technical recession to 29 years.

This good fortune owes much to Australia's ability to attract skilled migrants and sustain population growth of 1.6 percent a year, twice the OECD average.

In response, state governments have ramped up spending on infrastructure and firms are investing more in power, telecoms and commercial building.

Westpac estimates the total pipeline of projects under consideration is worth a cool $587 billion, with spending on public transport more than doubling.

That should help drive growth of 2.7 percent this year, though the bank then expects a slowdown to 2.5 percent in 2019 as weakness in wages weighs on consumer demand.

More optimistic is the IMF, which this week forecast growth of 3.0 percent for this year and 3.1 percent next.

"Robust emerging market Asian GDP growth implies strong external demand for Australian commodity exports," the agency predicted.

Yet it also warned an escalation in the trade spat between the United States and China would darken the outlook.

That danger has been increasingly on the mind of Reserve Bank of Australia Governor Philip Lowe who last week called it the main uncertainty for the economy.

The central bank has already held interest rates at record lows for 20 months, the longest stretch without a move in modern history. Markets are wagering it could stay on hold for another year or more, in part due to subdued inflation.

Indeed, analysts polled by Reuters expected inflation would remain near the floor of the RBA's 2-3 percent target band for a long time to come.

Consumer price inflation was forecast to average 2.2 percent this year and 2.3 percent in both 2019 and 2020.