2013-03-13 17:41:15 - New Country Reports research report from Business Monitor International is now available from Fast Market Research
Despite a pick-up in metal prices and improving global economy, we maintain our view the improvements in the mining sector will be insufficient fuel for economic growth in 2013. Related investment in this industry continues to be weighed down by high costs. Moreover, we believe that the recovery in the Chinese economy is not permanent, given that much of the structural imbalances remain at hand.
We believe that the housing market remains precarious, as affordability of home continue to edge to new lows. Given our poor outlook for the Australian job market in 2013, in which we forecast unemployment to reach 6.0% by the end of the year, we believe that demand for housing will decline. The overextended household balance
sheets further augur the growth in housing-related credit growth. In our opinion, the Australian banking sector is the sector most leveraged on the housing market and we expect that declines in house prices will adversely impact the industry.
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The ruling Australian Labor Party (ALP) barely clings on to its parliamentary majority, and we believe that the party will reverse its austerity stance. We expect more populist policies to be passed in effort to consolidate support for the ALP, alongside environmentallyfriendly policy to maintain political ties with the Green Party, now that elections are now set to be held on September 14. We forecast the Reserve Bank of Australia (RBA) to hand out another 50 basis points worth of cuts, expecting these to come nearer the end of 2013 when economic weakness becomes more evident.
We believe that central bank will continue to attempt to stave off a decline in credit growth by easy monetary conditions further.
Major Forecast Changes
The pick-up in investment activity in the mining sector is expected to improve the outlook for construction and infrastructure sector, and correspondingly, we have upgraded our forecast for investment growth. That said, we continue to hold a more conservative outlook on its impact on growth, given that businesses continue to face cost pressures and environmental policies which may still delay the start of these projects.
We maintain our expectations for the Reserve Bank of Australia (RBA) to cut its official rates to 2.5% by end 2013. However, we expect the federal government to put in more effort to revive the domestic economy, and have forecast the growth of real public consumption to rise to 2.0% in 2013, a reversal from previous year's austerity stance.
Import growth has remained higher than expected, as the strong demand for the Australian dollar has hindered the rebalancing of the Australia's external accounts. However, the collapse in import demand has accelerated over the past few months, and we expect this to continue in 2013, and have thus forecasted imports to grow at 0.0% (in nominal terms).
Key Risks To Outlook
China could implement aggressive stimulus measures to support its weakening economy, which would in turn support Australian exports and boost. 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.
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.
Partial Table of Contents:
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
BMI Political Risk Ratings
2013 Election Preview: Independents Hold The Key Once Again - Prime Minster Julia Gillard recently announced that Australia's federal elections will be held on September 14, and we expect election concerns to fuel paralysis on the policy front. Compared to the ruling Australian Labor Party (ALP)'s austerity plans, the Liberal-National coalition has put forth a number of proposed changes that could create a more investor-friendly business environment. At this stage, however, we believe the election is too close to call, as the independents remain unsure of the coalition's policies and a possible wave of anti-incumbency on the back of economic weakness could swing the results either way.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Three Key Challenges: Population, Climate Change, China
- The Australian political scene is expected to remain stable over the coming decade, although it will still face a number of key challenges. The most salient are managing population growth, climate change and relations with China.
Chapter 2: Economic Outlook
BMI Economic Risk Ratings
Mining-Led Bounce Insufficient To Avert Growth Slowdown
- Despite the uptick in mineral prices and Chinese demand, we expect rising costs in Australia to weigh on investment growth in the mining and energy sectors. Furthermore, we believe that the weak new orders in the manufacturing and services sectors suggest that growth malaise in the domestic economy remains. As such, we believe that the weakness in the job market will frustrate the government's efforts to lift the economy through public spending and policies that encourage household spending. Therefore, we maintain our expectations that an uptick in the growth of investment and public spending will be insufficient to avert a slowdown in Australia's growth to 2.1% in 2013, from an estimated 3.2% in 2012.
TABLE: ECONOMIC ACTIVITY
Austerity To Take A Back Seat
Full Table of Contents is available at:
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