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It is easy to become pessimistic about Australia’s economic prospects amid tumbling commodity prices, falling national income and deep cuts in planned spending on major resource projects. Over the next year or two at least it would seem that non-mining spending will grow insufficiently to outweigh falling mining investment spending. Lack-luster growth in national spending in turn causes an upward drift in the unemployment rate providing further reason for the heavily indebted household sector to spend cautiously extending the phase of soft economic growth. In essence this describes the “glass half empty” view of Australia’s economic prospects.
Yet it is not hard to take a more optimistic “glass half full” view of Australia’s economic prospects. Spending on housing is strong in parts assisted by low borrowing interest rates that are unlikely to move higher any time soon. Spending on housing is also flowing to housing construction. The latest home building approvals for November rose surprisingly strongly, by 7.5% in the month, and that coming on top of an out-sized 11.5% lift in October. A record number of homes are likely to be built in Australia in 2015 generating jobs growth in the sector. Once the new homes are completed, better retail sales usually follow too.
It is not just housing activity that is lifting. Retail sales have mostly been improving since mid-2014 and although up only 0.1% in November were up 4.5% since November 2013. Sharply lower petrol prices over recent months should also help boost retail sales.
Exports of Australian goods and services are rising strongly in part assisted by greater export capacity emanating from completed resource investment projects. While prices of Australian exports may be shaky for a little while yet, volumes should lift further. Some improvement is likely in the growth prospects of Australia’s major Asian export markets, China, Japan, South Korea, India and Indonesia. Especially as these countries are some of the world’s biggest net energy importers. The growth prospects of these countries now stand more chance of being under-stated in 2015 than over-stated in the wake of the sharp fall in oil prices since mid-2014.
The weaker Australian dollar is also likely to play a more significant role assisting Australian exports through 2015. In one specific case, tourism, the softer Australian dollar has already started to improve Australia’s net international tourism receipts. In the six months to November 2014, tourism related credits rose by 1.1% while debits rose by 0.3%. The surplus of credits over debits lifted from $A194 million in May 2014 to $A219 million in November and the net international tourism surplus is likely to expand much more through 2015.
Interestingly, leading indicators of employment in Australia such as the various job vacancy measures have also improved (the ANZ monthly job advertisement series has lifted for the past seven months consecutively) implying better employment conditions ahead. Of course the long-term decline in Australian manufacturing jobs will continue unabated in 2015 and significant job reductions will occur in the mining sector and also pockets of the public sector amid government spending cuts. Set against these losses and probably outweighing them by a significant margin, job opportunities are lifting strongly in the broad housing sector; in retailing; in wholesaling and transportation; and private services broadly. There is a reasonable chance that the unemployment rate will peak relatively soon and even start to decline noticeably later in 2015.
All told, the “glass half full” view of Australian economic prospects is a reasonably strong one and is a view that the Reserve Bank (RBA) seems to hold, hence its reluctance to lower the cash rate any further. However, it is also fair to say that the line has become a very fine one between the “glass half empty” and the “glass half full” view. The RBA will be watching closely the run of economic information over the next month or two to refine its economic view. The relative strength of overall spending in the economy is subject to greatest uncertainty. What is more certain is that inflation will stay very low for quite some time to come. In these circumstances, the most likely monetary policy outlook is that the cash rate remains unchanged at 2.50% for the next few months at least. The next highest probability is that the RBA cuts the cash rate further and a very long way third is that RBA starts to lift the cash.