2013-12-08 19:22:40 - New Country Reports research report from Business Monitor International is now available from Fast Market Research
core Views Across Australia's manufacturing, services and construction sec -tors, activity levels have been improving, with new orders picking up from their lows in Q213. Optimism from the election of a new Liberal-National government and stimulus measures around the globe have foster a more positive outlook amongst businesses.
We believe that the housing market remains precarious, as af-fordability of home continue to edge to new lows. Given our poor outlook for the Australian job market in 2014, in which we forecast unemployment to reach 6.6% 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 Liberal-National coalition was victorious in the federal elections held on September 7, securing a firm majority in the House of Rep -resentatives (lower house). That said, without solid spending cuts on the horizon whilst the compilation of more expenditure proposals to meet social and infrastructure needs, we believe that the fiscal rehabilitation will be delayed and now forecast a surplus only in fiscal year 2021/22.
We forecast the Reserve Bank of Australia (RBA) to hand out 50 basis points worth of cuts in 2014, bringing the cash rate to 2.00% by end-2014, even though the near-term economic outlook has improved. Indeed, we expect the factors that current support the economy to not suffice to outweigh the slowdown in the mining sector, and thus, believe that central bank will continue to attempt to stave off a decline in credit growth by easy monetary conditions further.
Major Forecast changes
We have pushed back our interest rate cut view to 2014, as the near-term pick up is likely to discourage the RBA from touching its interest rate levers. However, we believe the pressure to cut will return over the next few quarters, as the imbalances within the economy come to the fore.
We have raised our medium-term outlook for Australia's trade account, on the back of increased liquefied natural gas (LNG) processing capacity currently under construction. Given that gas exports could account for 15-20% of overall exports by 2017, we have revised our forecast to expect a sharper widening of the trade balance from 2015, and subsequently, a surplus in the current account by 2017. However, in the near term, we expect these projects to place pres -sure on import growth, hence resulting in a slower narrowing of the trade deficit over the 2014-2016 compared to our previous forecast.
Key risks to outlook
Policies implemented by major economies such as Japan, China and the US will likely have a significant impact on Australia. For example, Japan's policy direction on its use of nuclear power could have a drastic impact should it decide to turn its reactors back on. Should Japan, US and/or China enact more stimulus as their economies lose traction in 2014, the rebalancing in Australia could be delayed as the Australian dollar could face appreciatory pressures while demand for Australia's mineral exports remain supported.
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
policy changes May Be Held Back By senate politics
- Australia's Liberal-National coalition, led by Tony Abbott, was awarded 86 out of the 150 seats in the House of Representatives, taking the helm from Prime Minister Kevin Rudd's Australian Labor Party (ALP) after six years of rule. Over the course of the elections, the policy stance of both major parties has converged, suggesting that the sombre trajectory of Australia's fiscal finances will not change under the new government. Although we believe that the coalition government will attempt to improve the business environment, its lack of a majority in the Senate suggests that there are risks that its policies will be diluted and delayed.
taBLe: poLitica L oVerVie W
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
risks From capital Misallocation unpins our Downbeat outlook
- Several domestic and external factors have served to boost the level of economic activity in Australia. While we revised up our GDP growth forecasts for 2014 to 2.0%, from 1.8% previously, this change masks our concerns for the ever-growing risks within the Australian economy. Given that an increasing proportion of capital is being invested in the housing sector despite the weak performance of business spending, (a turnaround in which is required to generate wage growth), this misallocation of capital increases the economy's vulnerability to external shocks, on top of the ongoing weakness in the mining sector.
taBLe: econoMic actiVit Y
Fiscal improvements to remain scarce Despite change in Government
Full Table of Contents is available at:
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