Australia: Risk Assessment
Business Climate Rating1
Growth set to slow in 2015
In 2014, growth held up well driven by household consumption. Nevertheless, the rise in unemployment could dent household confidence (6.4% at end 2014 compared with 5% in 2012). Accordingly, savings levels are expected to rise slightly in 2015 and constrain activity. Households will priorities paying off their debts. Their debt levels are actually high (148% of GDP) compared with the other OECD economies. Moreover, the rise in real disposable incomes (1.5% in 2014) could subside as raw materials prices fall, which will squeeze the margins of companies in the sector (20% of GDP).
Since 2012, almost half of Australia's growth can be put down to the mining sector. It attracts a lot of investments, especially foreign, which will be forced to slow down in 2015. To counter the downturn in prices, the Australian central bank has announced that it will maintain an accommodative monetary policy. The key rate is, therefore, likely to remain at 2.5% in 2015. Investment in infrastructure will contribute to growth - needed as it is aging and inadequate, especially in the large towns and cities. In 2014, the Federal government introduced incentives to stimulate investment by the states pledging a bonus of 15% of the proceeds from the sale of public infrastructure assets, provided the income is reinvested in new infrastructure projects.
The construction sector will remain sound in 2015, as property prices continued to grow strongly in 2014 (+10%) encouraging investors not to rein in spending. However, the Australian market needs to be watched, as according to the OECD house prices were 31% too high in 2013.
Public deficit on the rise
The government could push back these adjustment objectives: public spending cuts at a time of rising unemployment will curb activity. At 30% of GDP in 2014, the level of public debt was the lowest of the large OECD economies.
Exports hampered by the Chinese slowdown
On the exports side, activity in the mining (coal and iron ore) and energy sectors (coal seam gas and natural gas) is largely dependent on demand from China (21% for goods and services, 60% for iron). Although Australia has signed a free-trade agreement with China, which allows it to position itself as a privileged partner, the country has to adapt to the Chinese slowdown. The fall in imports, especially capital goods, is however expected to limit the decline in the trade balance.
Exports of services (tourism, education) will be at a disadvantage in terms of price competitiveness due to the Australian dollar's high exchange rate against the euro. Apart from the deterioration of the trade balance, the balance of transfers and of revenues is also posting a deficit. This is the result of large outflows of investment income, especially as regards the mining sector. Moreover, Australia is dependent on expatriate workers due to low birth rates. Emigrants' income transfers to their families also put pressure on the current account balance.
The Australian banking system is exposed to property risk
The sector is highly developed, with assets representing three times the size of the economy (340% of GDP). It observes Basel III norms and therefore appears capable of resisting a large-scale economic shock. Nonetheless, it is very concentrated, as it is dominated by 4 large banks with very similar operating systems. They hold 80% of total assets and 90% of mortgages. They are financed mainly through the international markets and are interdependent (provide finance to each other). Two thirds of the real estate stock is backed by a mortgage. Outstanding loans represent 1,150 AUD (75% of GDP). A property crisis could, therefore, seriously weaken the banks and the economy.
Little political change in 2015
Elected in September 2013, Tony Abbott is the 28th Australian prime minister. With 88 seats out of 150 in the House of Representatives, the liberal coalition has a large majority. The next elections are scheduled for 2016, giving the leaders time to implement their programs.
Internationally, Australia is conducting a balanced foreign relations policy regarding two poles of power. On the economic front, it is seeking to improve relations with the Member States of ASEAN, while, on the diplomatic front, it will remain very close to the United States given China's rising power in the Asia Pacific region.
- Geographic proximity to emerging Asia
- Mining resources
- Moderate public debt
- Specific geographic features which favor tourism
- Vulnerable to commodities cycle and Chinese demand
- Substantial household debt (148% of disposable income)
- Shortage of skilled labor
- Highly exposed to natural hazard
- Wide disparities between federated States