Australia's 2019 economic outlook

Summary: Five leading economists give their views on growth, employment, inflation, interest rates, the dollar, and property.

Key take-out: The property market stands out as the major economic factor for 2019.

Late last year, we brought you our Australian economic wrap-up of 2018. As we noted throughout that piece, 2018 represented something of a holding pattern for the Aussie economy, with little to no movement in key indicators such as growth, inflation and labour underutilisation; while the unemployment rate improved, the dollar declined, and the cash rate remained unchanged.

With all that in mind, what’s in store for 2019?

A number of prominent economists have provided their thoughts on how the new year is shaping up from an economic perspective. Excerpts of what they have to say can be found below.

Growth

We don’t yet have the final economic growth data for 2018, but most economists quoted here are expecting economic growth to remain fairly similar to the most recent annualised figure of 2.8 per cent over the 12 months to September. Growth expectations range from 2.4 per cent at the low end of the scale, while the more optimistic outlooks project growth of close to 3 per cent.

Strong government spending and positive levels of net exports were consistently mentioned by the economists as significant drivers of growth in 2019, while the all-too-familiar theme of the property market, in addition to projected weakness in consumer spending, are consistently cited as the major factors holding back growth.    

Shane Oliver (Chief economist at AMP Capital)

“Through 2019, you’re looking [at] GDP growth around 2.7 per cent. On the one hand, there’s areas of strength: public demand is likely to remain fairly strong as [the] infrastructure spending boom continues, and the NDIS continues to ramp-up.

“Mining investment is fading as a drag on the economy, and at the same time, non-mining investment is looking healthier.”

Alan Oster (Chief economist at NAB)

“So we have growth slowing from [2.9 per cent] to around about 2.4 [per cent], and the reason for that is we have seen, and we are now expecting house prices to be a little bit more negative than we had before.

“So, before in Sydney and Melbourne, we had house price falls of around 10 per cent peak-to-trough, and now we’re talking around 15 per cent.”

Craig James and Ryan Felsman (Chief economist and senior economist, respectively at CommSec)

In their research report entitled Year in Review 2018; Year in Preview 2019, James and Felsman indicate that they expect an Australian GDP growth figure of, “near 3 per cent” in 2019.

David Plank (Head of Australian economics at ANZ)

“We are cautiously optimistic on the outlook, with GDP growth of around 3% expected in 2019. As noted, business conditions are elevated - indeed at levels that typically translate into above trend growth and a falling unemployment rate.

“The strong pipeline for infrastructure is providing significant support for the economy and we expect to see further increases in government spending and perhaps additional tax cuts given the improvement in the fiscal position. The outlook for exports looks robust.”  

Employment

Following a reasonably strong 2018 in the employment market – highlighted by the improvement in the unemployment rate – our economists are expecting the jobs market to cool a little this year. The general consensus among our economists is that unemployment may fall slightly below its current level, but for the most part, 2019 is expected to be a year of consolidation in this area.

Shane Oliver: “Jobs growth has been very strong in recent times in Australia. Indications are that that is likely to slow a little bit, with the ANZ Job Ads indicator and skilled vacancies losing a bit of momentum recently.

“That’s [going to] act as a weight on jobs growth, and [we’ll] probably see the unemployment rate – the improvement in the unemployment rate will probably stall around current levels.

“It may go a little bit below 5 per cent, but my view would be in a year’s time we’ll still be around 5 per cent.”

Alan Oster: “We still think employment is still pretty strong.

“So, if you like, to some extent, this is like a lag of what we’ve seen happen, and so we would expect that unemployment might fall to say, four-and-three-quarters per cent early next year, or early in 2019.

“And unfortunately, it sort of won’t do much better than that, is our expectation because by then, essentially growth is about the same as potential, so you don’t sort of cut away much in terms of unemployment, but it’s a labour market that basically gets to about four-and-three-quarters [per cent] for unemployment and sort of stays there.”

Craig James and Ryan Felsman: CommSec is anticipating an unemployment rate next year of, “near 4.75 per cent”.

Inflation

Much like the CPI itself over the past 12 months, there was very little discrepancy in what the economists had to say about inflation heading into 2019. All are expecting inflation to remain sluggish, with little to no movement from its current level of 1.9 per cent.

Shane Oliver: “Inflation I think will be another year of disappointment, with inflation around or below the bottom end of the 2 to 3 per cent target zone.”

Alan Oster: “On inflation, we don’t really have the core [measure] – which the Reserve Bank looks at – much better than 2 per cent, even by the end of next year.”

Craig James and Ryan Felsman: James and Felsman outline in their report that they are projecting inflation to be, “near 2 per cent” over the course of 2019.

Interest Rates

When it comes to interest rates, our economists are largely expecting much of the same as we turn to 2019, with the majority stating that they are forecasting the cash rate to remain the same. However, in a particularly interesting contrarian opinion, AMP Capital chief economist Shane Oliver is predicting that the RBA will ease rates in the latter stages of the year. His reasoning can be found below.

Shane Oliver: “And interest rates will end the year lower – [at] around 1 per cent.

"Currently 1.5 [per cent] … which changed our view to allow for two rate cuts: one in August, or thereabouts, and November, taking the cash rate down to 1 per cent by the end of the year, and that will be motivated I think by ongoing constrained economic growth, the ongoing weakness in house prices threatening consumer spending, and continued weakness in wages growth and inflation.”

Alan Oster: “So, in that sort of environment, I think the Reserve is definitely on hold in 2019, and when you get into 2020 – maybe by the end of 2020, or the second half of 2020 – you might be in a situation where core inflation is getting back towards the middle of the target, and then the RBA may start thinking about, ‘Well, now’s the time to … start to increase rates’.”

Craig James and Ryan Felsman: “Australian interest rates are tipped to remain on hold over most of 2019.

"We agree with the Reserve Bank that the next move in rates is more likely to be up.

"The job market is tightening and wages are lifting.”

David Plank: “For this reason even with a falling unemployment rate and rising wages we don’t think the RBA will act to raise interest rates until it is clear that the housing market is stabilising.

“We don’t think this happens until late 2019 or early 2020, delaying any upward move in interest rates until mid to late 2020.

“If housing stabilises earlier then the RBA could act before then.

“Of course, if the housing downturn destabilises the economy more broadly the outlook for interest rates will be very different.”  

Currency

As it so often does, the value of the Australian dollar in 2019 divided opinions. Two of our economists are of the opinion that the dollar will continue its slide, potentially as far as below US70 cents, while the rest expect that the dollar may bounce back a little throughout the year.

Shane Oliver: “Very short term, I don’t have a strong view, you can make an argument in the very short term that it may still have a bit more of a bounce.

“There’s talk of … the US Fed pause [continuing], but I think ultimately the Aussie dollar will have more downside over 2019, as Australian interest rates fall further below US interest rates.

“So, if the RBA cuts again, which it probably will in August and then November, then that will take Australian interest rates further below the Fed funds rate – below US interest rates, and that tends to act as a negative for the Australian dollar when that occurs.

“Basically more downside in the Aussie dollar, taking it [to around] 69 [US] cents by the end of the year.”

Alan Oster: “In the short term, we see the Australian dollar around the bottom of the [US] 70 cents range, so around 71 [cents] or so.

“But, to some extent, that’s really reflecting the US dollar [strength], rather than Australian dollar weakness.

“And so we think our models say that true value for the Australian dollar is around 75 [US cents].

“So … that’s sort of where we go back to by say, the middle of the year, we have it at around 75 [US cents], and sort of staying there over the medium-term.”

Craig James and Ryan Felsman: “With the US Federal Reserve becoming more ‘data dependent’ on lifting interest rates, the greenback may ease against major currencies. And that is especially the case if there are more compelling local requirements to lift rates in other nations. We expect the Aussie dollar to drift higher to the mid-70s against the greenback over 2019.”

David Plank: “As for the AUD, the lack of near term action by the RBA and a gradual deterioration in the global liquidity environment suggests it will lose some ground against the USD - possibly to the high 60s over the next three-six months.

"A bigger decline is unlikely unless the US Fed is able to deliver more than [the] two further rate hikes we currently expect.”

One issue which will shape the economy

Unsurprisingly, the property market dominated the conversation when it came to identifying a major theme/issue that would affect the Australian economy in 2019. It is, however, far from the only issue set to shape the economy, with consumer spending and wage growth; the US/China trade war; and the upcoming Federal election also featuring in responses to this question.

Shane Oliver: “To me, the big issue will be how far house prices decline through 2019.

“Obviously, they’ve fallen quite a lot already, but … that’s probably going to be the big driver of how the economy performs because as house prices come down, it has a negative impact on consumer spending.”

Alan Oster: “It’s still the consumer for me, and until you get wages growing more than two-and-a-half per cent, nothing’s going to happen with rates.

“So, for me, it’s the outlook for the consumer that’s critical, and we’re sort of half-assuming that whatever’s in the budget is going to be consumer-friendly and infrastructure-rich, if I can put it that way.

“And so, it might help a bit, but until the consumer gets more income, and feels more confident, then the economy’s ok, but it’s not going to shoot the lights out.”

David Plank: “It’s all about housing.

"How deep does the downturn go and how long does it last and how much impact does it have on household spending.

"These are the biggest domestic uncertainties for 2019.”