Six macro themes for Australia in 2012

Can Australia post its 21st consecutive year of growth in 2012? I think so, and here’s why.

PORTFOLIO POINT: After 20 consecutive years of growth, Australia is poised to notch up its 21st.

Australia is often referred to as the 'lucky country’. To some degree this is true. Proximity to Asia and a large resource endowment are certainly good fortune. However, good policy decisions are also part of the story. Australia has just ended its 20th year of continuous growth in 2011, a feat unmatched by any other developed country in that period.

Not all of this is luck. We expect that Australia will make it to 21 years, in part because policymakers are well-equipped to deal with potential problems. Here are six key macro themes for Australia in the year ahead.

Elephant in the room

Global developments will continue to be front and centre in 2012. While Europe remains in focus, for Australia the focus should shift to Asia in 2012, which is already seeing spillover effects from the financial developments in the West. We are still optimistic on Asia, but the risks are skewed to the downside. Clearly, the biggest risk (the elephant, if you will) for the Australian economy is a larger-than-expected downturn in China.

As always, much of the Australian outlook depends on the global performance. This is where the large risks lie.

Mining boom rolls on

Investment in the resources sector is expected to contribute about two-thirds of the growth in the economy in 2012. Much of this investment is “baked in”, given that most of the projects are large, well-funded and multi-year. The resources sector will be a key support for growth, but it is also crowding out other sectors of the economy.

The Australian dollar and the 'Dutch disease’

The 25% appreciation of the Australian dollar against the US dollar in the past two-and-a-half years has driven significant structural changes in the Australian economy and has held down inflation. We do not expect this to be repeated. As local businesses gradually adjust to the higher level of the dollar, we expect that the effect will wear off, which should help rebalance the economy somewhat.

The Australian dollar is expected to stay well above its post-float averages in 2012 and head towards US95¢ by the end of the year.

Deleveraging continues

Households have increased their savings and have been deleveraging their balance sheets for a number of years now. With the global risks prominent, we expect that households will continue to be cautious, though lower rates should put a floor under house prices.

Housing credit growth is expected to remain subdued and household consumption will likely slow in 2012, in response to a further modest weakening in the labour market, though this should be partly offset by lower interest rates.

The productivity challenge

The economy got support in recent years from rising commodity prices. With commodity prices now having peaked, growing the economy will rely more on enhancing productivity, an area that has been lacklustre recently.

This has implications for the inflation outlook because weak productivity growth means that the economy is unable to grow as quickly without generating rising inflation. In the June half, we expect limited concerns about inflation, with the RBA more concerned about the global growth slowdown.

However, by later in 2012, we expect that inflation will once again be on the radar screen, as the economy heads towards its capacity constraints.

Conventional policy works

With official rates still at 4.25%, we believe Australia has plenty of scope to use conventional monetary policy to support the economy – unlike many other developed economies. Given the low level of government debt, a fiscal response to a sharper-than-expected global downturn could also be implemented if necessary – although the government would be forced to concede its political imperative to return to a surplus by 2012-13.

The exchange rate could also provide support in the event of weaker growth.

Will it be a happy 21st?

We think so. If the Australian economy manages to grow in 2012, it will be the 21st consecutive year of growth. While there are clear downside risks to the global outlook for 2012, Australia’s economy is well placed, in our view.

Supporting growth will be a mining investment boom that is largely 'baked in’ and expected to account for two-thirds of GDP growth in 2012. In addition, the remaining parts of the economy are more interest rate-sensitive than the mining sector, and the RBA has ample scope to cut rates.

Given our central case for world growth of 1.9% in 2012 (down from 2.6% in 2011), we think the RBA will cut rates further, but it will not need to return to emergency levels reached after the Lehman Brothers failure.

With this support and a still weak supply-side of the economy due to weak productivity growth, we expect that the inflation threat will once again rear its head later in 2012.

Paul Bloxham is chief economist of HSBC Bank Australia Limited.

-HSBC forecasts for Australia
Year-average
Year-ended
2011e
2012e
2013e
Q311
Q411e
Q112e
Q212e
Q312e
Q412e
Q113e
%*
GDP
2
3.4
3.5
2.5
2.6
4
3.3
3.2
3.3
3.5
Consumption
3.5
2.7
2.6
3.8
3.7
3.4
2.8
2.2
2.3
2.4
Govt consumption
1.6
1.9
2.8
0.9
1
1.1
0.8
2.7
2.8
2.8
Investment
6.8
9.2
6.9
9.2
9.6
9.1
11.9
7.8
7.9
7.7
- Dwelling
-1.6
1
6.1
-2.9
-1.1
-0.4
0.5
1.2
2.9
5.2
- Business
16
17.1
8.5
21.9
21.3
19.6
23.7
13.3
12.9
10.9
- Public
-7.4
-6.7
1.5
-10.2
-9.6
-10
-9.4
-3.5
-3.5
-1
Final domestic demand
4
4.3
3.9
4.6
4.8
4.5
4.9
3.8
4
4
Domestic demand
4.3
4.1
3.9
4.7
4.4
4.4
4
3.8
4
4
Exports
-1.5
10.3
10.6
0.8
1.1
10.4
9.9
10.5
10.3
10.6
Imports
11.4
12.8
10.8
13.8
13.3
13.9
13.4
12
12
11.5
GDP (% quarter sa)
-
-
-
1
0.9
0.6
0.7
0.9
1
0.8
CPI
3.6
3.1
3.2
3.5
3.7
2.8
2.6
3.4
3.6
3.6
Trimmed mean
2.4
2.6
2.8
2.4
2.5
2.4
2.3
2.7
2.8
2.8
Unemployment rate
5.1
5.4
5.1
5.2
5.3
5.4
5.5
5.4
5.3
5.2
Labour price index
3.7
3.4
3.6
3.6
3.4
3.3
3.3
3.4
3.5
3.6
Current A/C (%GDP)
-2.2
-3.9
-4.8
-1.6
-2.2
-3.1
-3.8
-3
-3.3
-3.3
Terms of trade
14.2
-6.5
-4.8
13.2
8.8
1.1
-6.8
-10.5
-9.1
-6.6
Cash rate (end period)
4.25
3.75
4.25
4.75
4.25
3.75
3.75
3.75
3.75
4
*Unless otherwise specified
Source: ABS, RBA, HSBC forecasts

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