Australia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Firm resistance to the financial crisis as well as to the collapse in commodity prices and mining investment
- Reactivity of economic policy and exchange rate flexibility
- Geographic proximity to emerging Asia
- Attractive quality of life with immigration contributing to population growth
- Mineral resources
- Moderate level of public debt
- Tourism potential
- Trade dependent on commodities (specifically iron ore, coal) and Chinese demand
- Substantial household debt (185% of gross disposable income)
- Shortage of skilled labor
- Shortage of infrastructure able to respond to vast territory
- Highly exposed to climate risks
- Disparity between the federal states
Growth Close to Long-Term Average
Activity is expected to pick up in 2018 with growth set proving steady and close to its long-term average. The decline in mining investment should bottom, while investment in other sectors (tourism, education, research and development) will rise and the construction of public infrastructure, both at Commonwealth and State level, will continue to advance. This should offset the sharp slowdown in house building, with house prices clearly stabilizing in some cities against a background of tougher prudential rules on credit imposed by the Australian Prudential Regulation Authority and a slowdown in immigration. 50% of bank credit is linked to residential property. Despite continued employment growth, household consumption is expected to rise more moderately than before with little wage improvement and debt levels remaining very high - a quarter of households owe the equivalent of three or four years of earnings. Retail trade is, moreover, one of the rare sectors to lag behind, posting the highest level of bankruptcies ahead of construction. However, monetary policy will remain highly accommodative (central bank key rate at 1.5% in November 2017, unchanged since August 2016), at least if inflation remains below target (2-3%). Exports, 50% of which comprise gas, coal and iron ore, are expected to grow with the completion of several liquefied natural gas terminals. Since, at the same time, the moderation in household consumption and house building will put pressure on imports, trade’s contribution to growth is expected to increase. This assumes that commodity prices will not collapse should there be a slowdown in the Chinese economy.
Reasonable Budget and External Position
The authorities are aiming for fiscal equilibrium for the whole Commonwealth, States and local authorities by 2020-2021. Equilibrium is also the aim for the structural balance, i.e. smoothed out for cyclical effects. They expect to achieve this, while developing infrastructure, education and training (especially for the indigenous communities) and encouraging SMEs to invest in order to transition the economy from one focused on commodities to one that is diversified and to increase labor market participation and boost productivity. Moreover, the government plans to invest USD 30 billion in defense over the next ten years. Despite the fall in revenues due to to falling commodity prices, the deficit has only widened a little and the debt burden has grown only moderately, accounting for only 20% of GDP in June 2017, net of receivables.
The current account balance traditionally shows a moderate deficit, which, despite growing diversification, varies primarily in line with sales of commodities, namely with the volumes and prices, which depend above all on Chinese demand. As with goods, trade in services also shows a slight deficit. Tourism income and registration fees paid by foreign university students, especially from Asia, will not match spending by Australian tourists or ocean freight rates paid to foreign companies. The income balance also shows a deficit, more significantly because of dividend repatriation by mining companies and interest payments on external debt, mostly private (mining companies, banks, property sector) and denominated in Australian dollars, accounting for 128% of GDP (63% net of foreign assets).
A Weak Government
Having won 76 out of 150 seats in the Chamber of Representatives, i.e. a loss of 15 seats compared with the previous term, the center-right coalition led by Prime Minister Malcolm Bligh Turnbull and made up of liberals and nationalists was victorious but weakened after early elections in July 2016. Its tiny majority was then lost following the ruling that MPs with dual nationality were ineligible to sit in Parliament. Nor has the government majority in the Senate and the Liberal Party is riven by splits, further damaging the adoption of legislation. In these circumstances, government instability, which has prevailed since 2010 (five prime ministers in seven years), is therefore expected to last. There is little likelihood of this government holding on until the normal election date of November 2019, which could lead to a change in majority from 2018. However, this is unlikely to have much impact on the economy, given the convergence towards diversification.
Externally, Australia’s policy is to align itself economically more closely with the Asia-Pacific region (especially China) and Europe, with which it has signed trade agreements while maintaining preferential relations with the United States. The authorities are paying greater attention to Chinese investments in the country, given the sectors concerned, as well as to immigration, which is not considered to sufficiently benefit the economy.