The Australian economy – down but not out

July 31, 2019 / By  

The Australian economy has experienced a turbulent 2019. The most recent national accounts showed that the Australian economy only posted GDP growth of 1.8% over the 12 months to March 2019. The external environment has not been supportive with global economic uncertainty and the US-China trade war leading to fragile business and household confidence. However, the softer GDP figures are more a function of domestic factors with a reduction in consumption growth and private sector residential investment moving from a tailwind to a headwind for the Australian economy.

Economic growth projections for developed economies have been revised down over the next two years. The International Monetary Fund (IMF) World Economic Outlook (April 2019) has the Australian economy growing by 2.1% in 2019 and 2.8% in 2020. While the IMF’s projection is below Australia’s long-term (25 year) average GDP growth of 3.3%, Australia is projected to outperform major advanced economies in 2020 (Figure 1).

Figure 1: Advanced Economies GDP Growth, 2019 & 2020
Source: IMF (April 2019), JLL Research

The ingredients for a modest recovery in 2020 are already in place. The Reserve Bank of Australia (RBA) has moved to stimulate the domestic economy. The RBA has eased monetary policy with two 25 basis point cuts in the official cash rate over June and July. The official cash rate now sits at an all-time record low of 1.00%. The RBA continues to believe that the economic growth outlook is reasonable and this easing cycle is aimed at supporting economic growth and a lower unemployment rate.

The Federal Election in June re-elected the Coalition government with an improved majority in the House of Representatives. The government has moved quickly to provide fiscal stimulus with the implementation of income tax cuts. These cuts are largely aimed at low and middle income earners and should be supportive of consumer spending. Australian households are expected to respond positively to lower income tax rates and a reduction in the standard variable mortgage rate. Furthermore, the wealth effect should start to improve with Sydney and Melbourne house prices bottoming and the benchmark S&P/ASX 200 up almost 20% in 2019.

Longer-term, Australia is in the midst of major investment in economic and community infrastructure spend. Infrastructure spending will increase the productive capacity of the domestic economy. The most recent Federal Budget (2019/20) highlighted record transport infrastructure investment of $100 billion over the next decade. Real estate markets are highly sensitive to infrastructure spending and we are seeing the re-rating of sub-markets in Sydney, Melbourne and Brisbane.

The Australian economy is clearly facing short-term headwinds. However, even the most pessimistic private sector economist is not predicting an end to Australia’s record-breaking 27 years (and counting) of positive economic growth in 2019 or 2020. We may be down at the moment, but accommodative monetary and fiscal policy should support an economic recovery in 2020.

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