The year 2016 was one of red flags for the Australian economy. The mining industry boom is long past and Australia has been struggling to rebalance and attract investment into new industries.
After 25 years of growth, the so-called Lucky Country recorded a 0.5% year-on-year contraction in gross domestic product in 2016’s third quarter, illustrating the country’s overall weak position. Despite low interest rates, private investment in new plant, buildings, equipment and machinery fell 4% in the three months to 30 September 2016, lower than the economists’ consensus of 3%.
Despite the landmark contraction, economists are not pessimistic about this year. “We view the risks to growth as evenly balanced,” Paul Bloxham and Daniel Smith of HSBC in Sydney explained in a recent report. “On the upside, the lift in commodity prices and boost to incomes could provide more support for growth than we currently expect,” they noted. “On the downside, slower-than-expected growth in China could weaken demand for Australian commodities or services exports.”
The slow transition into new business sectors is most likely to continue throughout 2017, as the supply in real estate and housing will continue to exceed demand, making a great deal for renters but otherwise dragging down economic growth and marking a possible end to the real estate boom.
This year started positively for commodities with price rises for iron ore and coal. That upward trend is forecast to continue in the coming months, and flatten towards the end of the year. “Commodity prices have picked up, which is set to lift export values, nominal income growth, corporate profits, tax revenues, wages growth and inflation,” Bloxham and Smith noted.
Meanwhile, the government budget deficit is expected to increase. In November, Treasurer Scott Morrison warned that the budget might not be balanced by 2020-2021, as the government originally announced. He was responding to a report released by Deloitte Access Economics that warned the deficit was projected to expand by another A$24.3billion over the next four years.
The deficit could see Australia lose its much-prized AAA sovereign debt rating by Standard & Poor’s. Last year the credit rating agency put Australia on a negative rating outlook, with a view towards a potential downgrade in he next two years. “”Over the coming months, we will continue to monitor the government’s willingness and ability to enact new budget savings or revenue measures to reduce fiscal deficits materially over the next few years.”
Bond yields have risen sharply since S&P’s warning, and the trend is expected to crimp corporate earnings. However, the government sold a record A$9.3 billion in debt in January. The yield of 2.24% compared favorably with sub-zero returns in Japan, Germany and France. Nearly a third of the bond issue was sold offshore, mainly in Asia.