Australia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Geographic proximity to dynamic economies in Asia
- Attractive quality of life, with immigration contributing to population growth
- Rich endowment of mineral resources
- Moderate levels of public debt
- High tourism potential
- Exposed to commodity price volatility (specifically iron ore, coal, and LNG)
- Economy remains dependent on Chinese demand
- Substantial household debt (185% of gross disposable income)
- Shortage of infrastructure relative to the country’s vast territory
- Exposure to increasing bushfires and droughts
- Disparity between federated states
Growth rebounds but still under pressure
Growth is expected to rebound slightly in 2020. While a protracted downturn in the housing market has been the main drag on activity since 2018, signs of recovery started to emerge in the second half of 2019, with home price indexes rising in both Sydney and Melbourne. This was driven by the Australian Prudential Regulation Authority’s (APRA) move to loosen borrowing rules, as well as a total of 75 bps interest rate cuts by the Reserve Bank of Australia (RBA), which reduced mortgage repayment costs. The government also lowered income tax in July 2019, covering 70% of taxpayers. The boost in disposable income, together with an increase in household wealth due to a pick up in the housing market, will provide support for consumption growth. However, a series of large scale bushfires in December 2019 could weigh on domestic activity through declines in the tourism and consumer sectors, Household debt levels remain high at nearly two times of disposable income, or 130% of GDP. Retail sales expanded at a rate of 2.0% YOY in 2019, but this is almost flat on an inflation-adjusted basis, suggesting that the contribution to GDP remains dependent on inflation projections. Investors are facing uncertainties on the external front. Main exports include mineral fuels (coal and oil), metals (iron ore, copper, gold aluminum and zinc) as well as agro-food products (meat, wheat, wool, and wine). The external sector will remain under pressure in 2020 owing to the US-China trade war, which will lead to weaker demand from Australia’s largest export market; China. Commodity prices including iron ore will remain subdued, further dragging on exports. Government spending on infrastructure, which can be summarized by the $100 billion rolling infrastructure plan over 10 years, can help to offset some headwinds in 2020.
Modest public account surplus and current account deficit
The government posted a smaller-than-expected budget deficit in the financial year 2018-2019, which was equivalent to less than -0.1% of GDP. The government has committed to delivering a first budget surplus in over a decade in the 2019-2020 financial year. Reduced budgetary pressures have also provided more room for fiscal spending to improve infrastructure and provide funding to small and medium enterprises. Downside risk to the budget is stemming from a sharper deceleration in the Chinese economy and underperformance in the labor market. Public debt is expected to see a slight decline, on the back of a better government budget and modest economic growth.
The current account balance has shown a moderate deficit for decades, which, despite growing diversification, remains determined by commodity prices and demand from China. The current account recorded a surplus for the first time in 44 years in the second quarter of 2019, but this can be traced back to high iron ore prices and sustained demand from China, two factors that are set to soften into 2020. The depreciation of the Australian dollar may provide some support on the trade balance front, however this will not be enough and Australia’s current account will likely return to a deficit in 2020. The income balance will also remain in deficit, mainly due to dividend repatriation by mining companies and interest payments on external debt, which is mostly private (mining companies, banks, property sector) and denominated in Australian dollars. The current account deficit will be financed by borrowing from overseas and foreign investments in Australia.
Improved political stability after the 2019 federal election
In the federal election of May 2019, Scott Morrison led the center-right Liberal-National coalition to an unexpected victory, with a majority government securing 77 of the 151 seats in the lower house. The outcome marked the coalition’s third consecutive term in office, defeating the opposition Labor Party. New rules that require a two-thirds majority to unseat the incumbent Prime Minister imply that Scott Morrison will serve a full three-year term and achieve continuity in his economic policies, with a focus on reducing taxation and delivering a balanced government budget. In terms of foreign policy, the Prime Minister has maintained that Australia is working closely with both China and the US, but his emphasis on Beijing’s obligation to step up emission reductions and further reform its economy signal a more hawkish stance, especially following Australia’s decision to restrict Chinese companies in the development of Australia’s 5G infrastructure. The move was aimed at quelling domestic concerns over Chinese interference in Australia’s political system.