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Special Topic: A slower growth outlook for Australia

A transition period for Australia...

The Australian economy has begun rebalancing away from mining investment and is likely to experience slower growth before activity in the non-mining sectors and mining production expands. This special topic discusses the outlook for the Australian economy and its implications for the New Zealand economy.

...after a decade of mining investment-led growth

A feature of the Australian economy over the last decade has been the mining investment boom, driven by rising hard commodity prices owing to strong growth in emerging economies, particularly China. Mining investment growth accelerated, as mining firms took advantage of Australia’s recordhigh terms of trade, which increased by 98% from mid-2002 to the September quarter of 2011, an alltime peak. Mining capital expenditure (capex) as a share of total capex peaked at 60% in the December quarter of 2012, up from just 10.5% in 2002. Investment growth in other sectors, particularly manufacturing, was subdued over the same period.

Mining investment is expected to decline

The level of mining investment may have reached its peak in the December quarter of 2012, reflected in the large fall in mining capex in the March quarter of 2013. This is sooner than some analysts expected, but the data are lumpy so the peak may be still to come. The decline in mining investment is linked to slowing growth in China and expanding global supply of hard commodities. Investment growth is expected to decline in coming quarters, as capex in the non-mining sectors shows no signs of picking up so far.

Figure 7 – Private investment and mining capex
Figure 7 – Private investment and mining capex   .
Source:  Haver

Household demand weaker in recent years...

Growth in household demand has been falling since 2011; annual growth in household consumption fell from 4.0% in the March quarter of 2011 to 2.0% in the March quarter of 2013.

The slower consumption growth is owing to a combination of factors. The Reserve Bank of Australia (RBA) hiked its policy rate by 175 basis points (bps) between October 2009 and November 2010 in response to inflationary pressure. This led to higher mortgage rates that contributed to lower house prices from mid-2010 to late 2011, reduced household wealth, and constrained disposable income. Also, benefits from the mining boom were concentrated in specific regions, and did not support demand in the less affected areas against adverse shocks on income, such as the Global Financial Crisis. The ongoing fiscal consolidation by the Australian government since 2010 means that weak public sector demand growth will be another drag on overall demand in coming years.

...consistent with the softening jobs market

The labour market has been on a weakening trajectory since late 2010, in line with softness in demand. The unemployment rate has risen from 5.1% at the start of 2012 to 5.7% in July 2013, and is forecast by the Australian Treasury to rise to 6.3% in the June quarter of 2014. The Australian Treasury expects the unemployment rate to remain elevated as mining projects move to the less labour-intensive production phase. Employment grew by a subdued 1.1% in the year to June 2013, below the rate of growth of the labour force.

Easy monetary policy supporting the housing sector...

The RBA cut its policy rate between November 2011 and August 2013 by a cumulative 225 bps to 2.5%, leading to falling interest rates. Historically low mortgage rates supported housing demand, leading to accelerated growth in the value of new housing finance and house prices. Meanwhile, the supply side of the housing market responded positively to rising prices, with higher housing approvals and housing starts. However, the housing pick-up is still modest, with demand from first-home buyers still relatively low.

Figure 8 – Australia housing market
Figure 8 – Australia housing market   .
Source:  Haver

...but credit demand weak in other areas

Credit growth is weak for other sectors besides housing, and for households, despite easy monetary conditions. Annual growth of business credit has fallen steadily since mid 2012, to 0.3% in June 2013; growth of personal credit excluding mortgages has been negative throughout 2012, and just recently edged into positive territory. The outlook for investment and credit growth in the private sector is weak despite the currently low interest rates, as firms and households repay debt.

The outlook for growth is downbeat

While growth has not yet weakened significantly, the outlook for the next two years has. The RBA presented a downbeat assessment of the economy in August, revising down its growth forecast for 2013 to 2.25%, the lower end of the 2.25-3.25% forecast range it articulated in November 2012. The Australian Treasury cut its growth forecast for the 2013/14 fiscal year by 0.5% points to 2.5%, down from its Mid-year Economic and Fiscal Outlook released in October 2012. Consensus forecasts for Australia have fallen since the start of the year, by 0.2% points for 2013 and 0.4% points for 2014, to 2.4% and 2.6% respectively.

However, AUD depreciation should facilitate the transition to tradables sectors...

Continued depreciation of the AUD should provide some support to activity. The AUD has fallen by 14.3% against the USD since mid April, and is expected to fall further as the US Federal Reserve finalises its plans to taper quantitative easing, and as the terms of trade continue to ease. Currency depreciation is expected to lift competitiveness in the manufacturing and other tradables sectors, facilitating the rebalancing into these areas.

...while fundamentals remain solid compared to other developed economies

The Australian outlook is still solid compared to the other major developed economies. The unemployment rate remains low compared to the US and the euro area, while financial risks are contained. Growth in Australia is slowing from its rapid pace in the past decade, but remains higher than in most other developed economies.

Short-term impacts on NZ exports negative...

A softer Australian economy in the short run will negatively impact on NZ’s growth. Despite China’s growing importance, Australia still accounted for the largest share of total NZ goods exports in the year to June 2013, at 20.8%, and therefore falling demand growth in Australia will be a drag on external demand for New Zealand. Somewhat positively, the drag will be more limited for the two largest categories of exports to Australia in 2012 (crude oil and gold), as volume changes in these items are primarily driven by supply-side factors, while prices are dictated by world supply and demand. However, other goods that form a significant share of exports to Australia, including wine, dairy, processed food, fish and wood products, and services are likely to experience lower growth both in volume and value terms.

...but positive in the long term after a successful rebalancing...

A successful, gradual rebalancing into the nonmining economy in the long run should be positive for New Zealand. A recovery of competitiveness in the non-mining regions along Australia’s eastern seaboard will lead to a pick-up in employment and wage growth, which will restore the growth of household demand. A stronger pick-up in Australia’s housing supply as the recent RBA rate cuts take effect will directly benefit NZ exports of wood products and other building materials, and also have a positive effect on private consumption. These developments should bolster the demand for NZ exports to Australia, most of which are destined for the eastern states.

...while emigration to Australia is expected to ease

In the near term, weaker employment prospects and reduced wage growth across the Tasman should lower the outflow of New Zealanders to Australia. Indeed, the number of net long-term migrants to Australia has already dropped back in the first half of 2013 and the fall is expected to continue. However, net migration to Australia remains at an historically high level. While it is expected to fall in the near term as mining investment slows, renewed growth in Australia’s non-mining sectors after a successful transition is expected to maintain the historical pattern of more New Zealanders leaving for Australia than Australians coming in or Kiwis returning.

However, a high NZD/AUD exchange rate will lower NZ competitiveness

The NZD has appreciated 12.4% against the AUD in the year to August, on the back of easing hard commodity prices and RBA policy rate cuts. The NZD/AUD exchange rate is expected to remain high, and may rise further as the monetary policy outlook is likely to continue to diverge between the RBNZ and the RBA. A stronger NZD relative to the AUD will reduce the competitiveness of NZ exports to Australia, and of local services provided to visiting Australians. However, there may be some positive savings for consumers of imports from Australia, for example motor vehicles and pharmaceuticals, and cost-reduction for firms dependent on inputs originating from Australia.

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