Australia continues to perform well despite fears coming out of Europe

Australia looks to have achieved 2 per cent growth in calendar 2011, driven by mining-related investment and a household sector that is gradually growing in confidence. This is despite the headwinds of a high Australian dollar, the floods at the beginning of the year, tightening of Government spending, and ongoing economic turmoil in Europe and the United States. Non-mining profitability, having largely tracked sideways for three years, now also appears to be recovering. But employment growth remains anaemic. Final demand is extremely strong in Western Australia and Queensland, but remains insipid elsewhere.

Despite fears related to Europe, the outlook for 2012 is even better. We are forecasting 3.8 per cent growth. This reflects ongoing mining-related investment, increased household spending, and eventually a recovery in other investment – particularly residential. Growth will be further supported by lower retail interest rates – we expect the Cash Rate to be reduced a further 25 basis points in February. On the other hand, the Government’s commitment to return to surplus in 2012/13 will provide an ongoing drag on growth

We interpret the poor employment performance over 2011 as unwinding the stronger-than-expected employment growth in 2010. But there is a limit to how far this can go. We therefore expect employment growth to pick up next year, providing a further boost to household spending.

Mining-related investment is pretty much locked in, and will continue to keep a floor under GDP growth for the next few years. A key risk to the outlook is that events in Europe lead to further delay or cancellation of non-mining related investment. So far, the Australian economy is weathering the fall-out from Europe pretty well. The top has been taken off commodity prices, but they remain extremely high. Chinese growth is slowing, but only a bit…and it needed to. Bank funding costs are rising, but only slightly.

We think the ability of authorities here and in China to provide additional stimulus if needed, the sheer volume of mining-related investment already in train, and the high household saving rate mean that Australia should still perform pretty well next year, even if the situation in Europe takes another nasty turn.

Topics in December/January

• Foundations in place for strong growth in 2012
• The Government has scope to provide more support to the economy
• September quarter National Accounts
• Industry output and profits
• Engineering activity underpins rise in total construction
• A wall of investment still to come
   

Topics in Forthcoming Bulletins

• Productivity by industry sector
• Commodity prices, exports and imports
• The changing landscape in industrial relations

Joy Xenita

PH: +61 2 8458 4220