Real GDP growth is highly likely
to slow over the coming years owing to a number of factors: slowing growth in
the working age population; a high share of government spending relative to
GDP; a reversal in the country's terms of trade; and the growing risk of
deflation. These impediments will result in real GDP growth averaging 2.3% over
the next decade, down from 2.7% over the past decade.
Australia's federal elections are
widely expected to be held on July 2, and we believe that the lack of policy
certainty, as the elections will be a close fight between the ruling
Liberal-National coalition and the opposition Australian Labour Party (ALP),
will be negative for investment and act as a drag on economic growth. In the
event that the coalition secures a victory in the elections, the inability to
reduce expenditures when revenue growth is weak will divert scarce resources
from the productive sector of the economy and crowd out the private sector to
the detriment of the business environment. We remain bearish on the Australian
dollar despite the large fall we have already seen in the currency. While
valuations are no longer a headwind to the currency, the trend remains very
bearish. Weak economic growth owing to falling investment and correction in the
property market amid elevated indebtedness does not bode well for the AUD.
The Liberal-National coalition
government led by Prime Minister Malcolm Turnbull presented its FY2016/17
(July-June) budget on May 3, and maintained its goal of a balanced budget by
FY2020/21. We believe that the administration's target is ambitious, and
Australia's fiscal accounts are unlikely to return to a surplus any time soon,
given downside risks to revenue collection and a lack of expenditure cutbacks.
While there is currently no danger of a fiscal crisis, our core view is that
this growing burden of the government will undermine the productivity of the
private sector and take its toll on economic growth over the medium term.
Following the Reserve Bank of
Australia (RBA)'s 25 basis point (bps) cut to its cash rate to a fresh
historical low of 1.75% at its May monetary policy statement, we forecast the
central bank to reduce its benchmark policy rate by another 25bps to 1.50% in
by the first quarter of 2017. The central bank will ease its monetary policy
further as overall economic growth deteriorates and as the unwinding investment
boom is compounded by a weakening housing market amid a subdued inflationary
environment.
Major Forecast Changes
We downgraded our 2016 and 2017
real GDP growth forecasts to 2.1% and 2.2%, respectively (from 2.3% and 2.5%
previously), as investment in the mining sector continues to contract, and this
will be compounded by weakness in the housing market.
We revised our average 2016
Australian dollar forecast stronger to USD0.7300/AUD (versus USD0.7000/AUD
previously) owing to the AUD's strength since the start of the year. However,
we remain bearish on the currency over the medium term as the country's
still-elevated indebtedness leaves the currency exposed to capital outflows
amid an economy that is suffering from an unwinding investment boom and a
correction in the property market.
We revised our FY2016/17 federal
budget deficit forecast to 2.5% of GDP from 2.1% previously as the ruling
Liberal-National coalition focuses on supporting economic growth, particularly
as it announces new spending initiatives, hoping to return the coalition to
power.
For more information Visit at: http://mrr.cm/Jdz
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