Introduction

Ever since the mining boom ended around 2011/2012 there have been constant predictions of doom for Australia. Foreign commentators and investors seem to have been particularly bearish on this front. I seem to constantly come across an ad on the internet titled “Australian Recession 2015 – Why it’s coming, what to do and how you can profit. FIND OUT MORE”. Never mind that last year the same ad referred to 2014! The mining collapse is still unfolding and growth has not been great, but the bust for the Australian economy many have been foreshadowing has not occurred. This note looks at the latest growth figures and seven reasons not to be too gloomy.

First the bad news - growth is too slow

March quarter GDP growth in Australia was much stronger than expected at 0.9% quarter on quarter.

Source: ABS, AMP Capital

However, on an annual basis it has slowed to just 2.3%, which is well below potential growth of around 3-3.25%. What’s more, inventories contributed 0.3 percentage points to growth and net exports contributed 0.4 percentage points so domestic final demand was actually flat in the quarter or just 1.1% year on year. While home construction has picked up (+9.2% year on year) and consumer spending is okay (+2.6% year on year), public demand is weak (-0.2% year on year) and business investment is falling sharply (-6.1% year on year) led by mining investment. Business investment (or capex) plans from ABS surveys point to more weakness ahead. Comparing the latest estimate of investment for 2015-16 with that made a year ago for 2014-15 points to a 25% fall in business investment in 2015-16 (see the next chart) and another approach points to a 23% fall.

Source: ABS, AMP Capital

Mining investment is now falling rapidly back to 2% of GDP as large projects complete. To offset this we need to see growth in other parts of the economy pick up and we have seen some success with housing and consumer spending. However, nonmining investment remains disappointing; with capex plans pointing to renewed weakness in the year ahead (see the next chart). This in turn is threatening growth.

Source: ABS, AMP Capital

More broadly, several factors seem to be behind continued subpar growth in the economy including: steeper than expected falls in commodity prices that have cut into nominal growth (nominal GDP growth was just 1.2% over the last year); the ongoing threat of more budget austerity; understandable household reluctance to take on more debt post the GFC; the $A remaining too high; and non-mining companies understandably taking a while to turn around from the battering they took through the mining boom (thanks to the strong $A, high and interest rates and competition for labour).

Against this backdrop an even lower $A is probably still needed (expect it to fall in $US 0.70 by year end) and to ensure this occurs the RBA needs to continue trying to jawbone it lower and, if need be, cut rates again. The chance of another rate cut is now around 50/50 with the August RBA meeting at which it will next review its economic forecasts being the one to watch.

Seven reasons not to get too gloomy

While growth is sub-par and growth in domestic demand is particularly weak it’s not the recession some continue to fear. There are seven reasons for optimism.


Source: AMP Capital


Source: ABS, AMP Capital


Source: ABS, AMP Capital

So while growth remains sub-par, the risk of a recession remains relatively low and growth should start to move back to around trend at some point next year. In other words there is no reason to get overly gloomy on Australia.

Implications for investors

With the commodity tailwind now a headwind for the Australian economy and the Australian dollar likely to remain under downwards pressure it makes sense for Australian investors to have more in offshore investments than was the case a decade or so ago. Interest rates are also set to remain very low.

However, there is no need to get too gloomy on the outlook for Australian assets. The economy is likely to avoid recession or a severe slump as growth continues to gradually rebalance. And the yields on Australian bonds, shares, commercial property and infrastructure remain relatively attractive globally.

While the Australian share market ran ahead of itself earlier this year and has been in correction mode for the last few months, by year end it should be able to push up to the 6000 level.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.