Australian economy in 2017

Colin Brinsden, AAP Economics Correspondent
(Australian Associated Press)



The economy posted its worst performance since the global financial crisis in the September quarter 2016. While economists expect the economy to avoid two consecutive quarters of negative growth and a technical recession, it is a threat hanging over the nation until the next set of national accounts figures in early March. At an annual rate of 1.8 per cent it is running well below a long-run average of just under three per cent, which will keep pressure on the jobless rate. The government does not expect a three per cent growth rate until 2018/19.


The jobless rate unexpectedly rose to 5.7 per cent in November, ending a steady decline over the year. Employment growth has been fairly flat over the second half year, highlighted by a switch to part-time hirings rather than full-time. This has resulted in wages growth slowing to a record low and keeping only just ahead of inflation. Benign wage growth and rising unemployment will remain drag on the federal budget.


The Reserve Bank has shown reluctance to trim the cash rate any further after cutting to a record low of 1.5 per cent in August. However, the growth figures were weaker than the central bank had been expecting, causing some economists to believe a cut will be on the cards when the RBA board next meets in February. The risk is retail banks will not pass on the reduction given they are already increasing some of their lending rates against the backdrop of rising global interest rate markets.


Consumer confidence has been shaken out of a period of stability by the poor GDP numbers, weak jobs growth and uncertainty over the interest rate outlook. Such pessimism could weigh on household spending, a large component of economic growth.


What will US president-elect Donald Trump will do when he takes the reins at the White House on Saturday (AEST)? Markets have assumed he will take an expansionary stance, which has caused interest rate markets to price in tighter global monetary policy. The big unknown is whether Trump will go ahead with a threat to slap a big import tariff on Chinese goods, which could have ramifications for the Australian economy given its close trade ties with the Asian giant.


Treasurer Scott Morrison remains committed to returning the budget to surplus in 2021. The mid-year review showed a deficit of $36.5 billion in 2016/17 and would still be $10 billion in 2019/20. Slow economic growth, stubbornly high unemployment, record low wage growth and subdued business profits and investment could weigh on the budget. Volatile commodity prices could also threaten the outlook if they fail to maintain their present buoyancy.


Global rating agencies will be watching the budget with a keen eye. Standard & Poor’s already has Australia’s top-tier triple-A rating on a negative outlook. The agencies gave the budget review a nod of approval, but any further deterioration could see them take action after the May budget. A feared downgrade would result in banks paying more for funding in overseas markets and accelerate the risk of higher interest rates for their customers. It would also be a big hit to confidence and for the government.

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