2012-11-14 22:04:57 -
Australia Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com
After the stellar growth outturn recorded in Australia in Q112, base effects placed serious upside pressures on our headline growth forecast for 2012. So while we have upgraded our 2012 growth forecast to 2.1%, weak performance figures from a large cross-section of the economy leads us to maintain a downbeat outlook for the economy in 2013.
Given the uncertainty around China´s economic performance and declines in iron ore and coal prices, we believe that the mining sector will be unable to support the Australian economy. The economy´s reliance on overseas funding is likely to compound problems in the event of a reversal, with its banking sector most at risk. The ruling Australian Labor Party (ALP) struggles on with dwindling popularity, barely
clinging on to its parliamentary majority as one of its members and the speaker of parliament continues to be sidelined due to investigations on their conduct. Despite pledges to support businesses, we expect more populist policies to be passed in effort to consolidate support for the ALP as elections draw near in 2013.
We continue to expect that the goal of fiscal surplus in FY2012/13 will be forced to take a back seat as voters and business pressure the Treasury into supporting domestic demand. We maintain our forecast for the Reserve Bank of Australia (RBA) to hand out another 50 basis points worth of cuts by the end of 2012. The central bank will attempt to stave off a decline in credit growth through easy monetary conditions. While we continue to expect the RBA to cut rates further as the housing market weakens further, we believe that these cuts will be unable to boost credit demand.
Major Forecast Changes
We upgraded our forecast for economic growth in 2012 to 2.1%, reflecting the strong performance in Q112. However, this does not signify that the country has escaped the recession. It only serves to delay the rebalancing process that the Australian economy must undergo. We further downgraded growth in 2013 and 2014, expecting these structural changes to mean slower growth in the future, and thus, forecast the economic growth to come in at 0.9% and 2.3% in 2013 and 2014 respectively.
In line with our expectations for consumer price inflation to weaken, with Q212 inflation print coming in at 1.2%, the lowest in 13 years. Given our recessionary outlook for the economy as domestic and external demand wanes, we have thus revised down our 2012 average and year-end targets to 1.3% and 1.0% respectively, from our forecast of 1.8% for both previously. Import growth has remained higher than expected, as the strong Australian dollar has hindered the rebalancing of the Australia´s external accounts.
We have thus revised our 2012 import growth forecast to 3.3%, but continue to expect the country to report a trade surplus for 2012, and narrow the current account deficit to 1.9% of GDP. Australia´s unemployment rate has remained steady despite the loss of 33,900 full-time jobs in June. Given the slower than expected rise in unemployment rates, we have revised down our average and end-year forecast for 2012 to 5.5% and 6.0% from 5.9% and 6.4% respectively. The fall in the number of job vacancies continues to support our view that the Australian labour market will remain soft and unemployment rates are likely to rise as the economy slows.
Key Risks To Outlook
China could implement aggressive stimulus measures to support its weakening economy, which would in turn support Australian exports. While we maintain that any Chinese stimulus is likely to be smaller than the previous boost in 2008/2009, this remains a key risk and is something we will be watching closely. Although the government has chosen an austere budget for FY2012/13, aiming to return to budget surplus despite the souring economic climate, we highlight that there is a risk that a sharp decline in residential home prices will spark even more strain on other sectors of the economy and the government could be forced to step in and boost the domestic demand.
Australian banks continue to be highly exposed to the domestic housing market. Given its reliance on external markets for funding, the banks could face a liquidity crisis should external counterparts withhold funding due to the deterioration of its balance sheet as the housing market sours. In order to prevent financial panic, government intervention could be needed in this scenario, which could force the budget deficit into double-digit territory.
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