Economic outlook

Health check for Australia – how are we doing?

Economic growth of a meagre 0.2% last quarter, more than 770,000 Australians unemployed, paltry wages growth and a flailing sharemarket – is Australia going to be OK or could we be heading for a recession?

That’s the question being asked by some economic commentators as Australia’s transition from the mining boom of the 2000s to a broader-based economy grinds on.

While there are doomsayers predicting the worst for the economy, most economists are not tipping a recession in the near future. Westpac’s Chief Economist Bill Evans, for example, believes Australia’s economic growth is likely to continue to remain stubbornly low in 2016, but does not predict negative growth.

Mr Evans says the latest economic indicators appear to suggest that the economy may grow slower than the 3.0% growth rate currently predicted by the Reserve Bank of Australia, but he says it is more likely to be around 2.5% to 2.75% than negative growth. As you can see from the chart below, while this is positive, it is still well below long term trend GDP growth of close to 3.5%.

The latest Business Outlook by Deloitte Access Economics also points to below trend growth in Australia over the next two years.

“The negatives facing Australia are big and growing: China is throwing the kitchen sink at its slowdown, but that hasn’t been enough to halt the slide in global commodity prices,” the report says.

“Yet the positives are big and growing too. The Australian dollar’s fall is already throwing its lovin’ arms around the Australian economic outlook. And there’s plenty of good news still to come, as it takes two years for a lower Australian dollar to have its maximum positive impact on the economy. Ditto interest rates, whose ‘lower for longer’ profile will keep generating good news.”

BT Financial Group Chief Economist Chris Caton says Australia’s economy is still suffering from “the bust phase of the mining capital and commodity price boom”.

“That’s taken growth out of the economy and we haven’t been able to replace it yet,” he says.

“We’ve cut interest rates and that’s helped. Residential construction is up 10% over the year. The exchange rate has come down and that’s helped. Exports of tourism and educational services are growing rapidly but it’s just not enough.”

Taking these factors into account, Mr Caton has forecast that the Australian sharemarket (as measured by the ASX 200) will finish the year between 5300 and 5500 and the Australian dollar will finish the year at about 72 cents.