Australia: Risk Assessment
Business Climate Rating1
Investment and consumption drivers of growth in 2014
Growth slowed in 2013, in line with the downturn in commodity prices, correlated with the sluggishness of the international economy and the decline of activity in China. Domestically, household consumption also slowed against a background of a weaker international environment. In 2014, unemployment reached a higher level than in 2013 (5.9% at the end of June 2014) and is thus weakening household consumption. In May 2014, car sales diminished by 7.1% year on year. The 2.5% cut in the Reserve Bank of Australia’s (RBA) key rate in August 2013 will impact positively on household finances, especially by bringing down interest payments on mortgages, most of it taken out at variable rates. As a result, disposable income will rise slightly, helped also by better real wages. Besides, property prices increased sharply (+10% in 2013, +17% in Sydney) leading the IMF to cite Australia as a country exposed to bubble risk. The increase in credit expansion (+4.7% year on year in May 2014) is essentially due to mortgages (+5.2% yoy). However, this prices’ increase generated wealth effects. Consequently, consumption will contribute only slightly to growth in 2014.
While households’ confidence is depressed, entrepreneurs’ confidence is running on a positive trend. The productive capacity is slightly above 80%, which is increasing compared to 2013. Nevertheless a gain of 1 to 2 %p will be needed for investments in equipment to materialize. The change of majority, a consequence of the September 2013 general elections, brought the Liberals to power. The new Prime Minister, Tony Abbott has promised to liberalise the country and promote investment. The first measures taken will therefore be directed to businesses. The corporate tax will be reduced by 1.5 %p (currently at 30%). Abbott has also abolished the carbon tax. Construction will support investment. In a few cities (Sydney, Melbourne, Perth, Gladstone), construction of new housing is growing at a slower pace than demography. The number of building permits was increasing by 16% yoy at the end of April 2014. Investment will thus positively contribute to growth in 2014.
Inflation should be relatively similar to 2013 (+2.5%) due to low interest rates, stable consumption, excess capacity production, and public spending which are constrained by the willingness of the government to reduce the budget deficit for the 2014-2015 budget (July to June). Cuts in spending (unemployment, health, and international aid) as well as a tax hike – especially on high income earners (+2%p) - are expected.
Exports hampered by the strength of the dollar.
Due to exceptional climate conditions (less strong winds), Australia exported a higher amount of iron, liquefied gas and coal than usual. These good results have had a positive effect on growth – especially on net exports. The Australian current account deficit remains high 2014. On the import side, recent government measures will boost demand for machinery and capital goods. On the export side, the mining (coal and iron ore) and energy (coal gas and natural gas) activity is largely dependent on demand from China (21% for goods and services, 60% for iron). Chinese demand for Australian products will again slow, as the high exchange rate of the Australian dollar against the American dollar, despite an expansionary monetary policy, is affecting price competitiveness. Moreover, China is keen to diversify its suppliers in order to maintain clout in negotiating prices. To boost its competitiveness and attractiveness, Australia is seeking to sign free trade agreements with its main trading partners (China (No 1), Japan (No 2, 12% of trade), South Korea (No 4, 5.5%)).
Public debt (27%) is low compared with that of other developed countries (75%). The new government therefore has room to manoeuvre in order to sustain domestic demand. In this context, fiscal revenues could decline in 2014.
A change of majority
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. It replaces the Labour Party, which became very divided only a few months before the elections. Julia Gillard, Prime Minister until July 2103, was hurt by the fall-out from the carbon tax, which, together with a sharp fall in commodity prices, weakened the economy. Less than three months before the elections, the Prime Minister was ousted by her party in favour of the former Prime Minister, Kevin Rudd.
Tony Abbott made combatting illegal immigration (essentially from the Islamic Republic of Iran) one of his campaign’s priorities, which could generate tensions with minorities.
Internationally, Australia has two main concerns. On the economic front, it is seeking closer relations with the ASEAN member states, while on the diplomatic front, it will remain close to the United States in view China’s rising power in the Asia Pacific region.
- Geographic proximity to Emerging Asia
- Mineral resources
- Moderate public debt
- Solid banking system
- Dynamic demographics
- Geographic features that favour tourism
- Vulnerable to commodities cycle and Chinese demand
- Substantial household debt (over 150% of disposable income)
- Shortage of skilled labour
- Highly exposed to natural hazards
- Wide disparities between federated States