Economic update: the long grinding cycle continues


Thursday 01 December 2016

Recent economic data has continued to paint a mixed picture for the Australian economy, as it transitions from a reliance on the mining investment boom and growth to a broader mix of economic activity.

For business owners this economic data is important to contextualise the environment your business operates in now, and to help understand the challenges and opportunities on the horizon.

Economic growth (GDP) is currently increasing at a rate of 2.3%, below Australia's long-term trend of 3.25%. Importantly however, half of this current growth can still be put down to the resource sector's contribution of 1.3%. This means the rest of the entire economy, from consumption and business activity to government spending, is growing at just 1%.

So what are the challenges and opportunities businesses across all industries are facing in the current economic climate?

The challenges

Firstly, the decline in commodity prices is impacting our national income, which in turn feeds down to households through a slower growth in wages.

The Australian dollar has also stubbornly held up above most analysts' fair value. However with an expectation that the US Central Bank will raise interest rates soon, as the US economy is near or at 'normal', it is likely the US dollar will continue to strengthen aiding further depreciation of our local currency.

This is important to help Australia's competitiveness and rebalance our economy, and is something that would be welcomed by business in particular.

Another key potential driver of growth which has been lacking in the current climate is business investment (capex). The most recent data suggests we will see this decline for a third consecutive year and in fact, manufacturing capex is now below depreciation rates, which has not been seen since 1975 when investment equalled depreciation. However it is important to remember that this is an extremely rare occurrence and unlikely to persist in the coming years as the capital replacement cycle will re-start.

Overall, Australian business has the capacity to invest yet confidence is lacking for many. Certainly the recent Federal Budget has taken some positive steps for small businesses to start putting investment front of mind.

Following the RBA's interest rate cut to 2% in May and the well-received Federal Budget, consumer confidence bounced 6.8% in May, which is the largest gain since the 2007 pre-election Budget.

However one month later, this was short lived with the most recent Westpac/Melbourne Institute consumer confidence survey losing all of those gains and being down 6.9%. The Index is now below 100 at 95.3, indicating renewed concerns about the economy, and most notably jobs, house prices and uncertainty in Europe.

Opportunities ahead

The official cash rate is at a historically low level, at just 2%. Despite weak consumer confidence, households are starting to show their preparedness to be more active with their spending habits, and there are initial signs consumption is turning up from a low base, which is good news for business. This is partly driven by an increase in residential construction, albeit financed by the low interest rates and existing savings. Importantly, the savings ratio of Australians has been at the highest level since 1986.

For business, hiring intentions are rising as is the job ads index, a leading indicator showing that Australian businesses are preparing to expand.

Much has also been said on existing home sales prices, particularly in Sydney and Melbourne. It's important to remember that construction, both residential and non-residential, is critical for economic growth as both bring a whole range of ancillary economic activity.  

Building approvals at 203,000pa are currently at a cyclical high and if converted to actual commencements would generate a whole range of new economic activity, as well as potentially boost supply and help cool price growth.

The combination of business's preparedness to invest, improving consumer attitudes to spending and a weaker Australian dollar may see the RBA's own forward forecast of economic growth (returning to the long-term trend growth range of 3% to 4% by Dec 2016*) become a reality, and one which will be welcomed by the nation's business owners.

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This material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.

* RBA Statement on Monetary Policy February 2015.

Except for Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 (MBL), any Macquarie entity referred to on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Cth). That entity’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.