citi insights into solution for australian economic growth

July 4

Synchronised global growth no panacea for Australia

By Simson Sanaphay

  • Australia's is approaching 26 years without recession, and with the global economy entering a growth phase that trend should be secure for years to come. But there are some clouds on the horizon that need careful observation. Citi expects all major western economies, with the exception of the United Kingdom, to do better this year over last. Australia is expected to sneak in with growth of 2 per cent this year, climbing to about trend of 2.75 per cent next year (real GDP rate).
  • But the global economy is expected to do better, with growth of 3.1 per cent in the second half of this year and 3.3 per cent in the first half next year. Given that Australia avoided the worst of the Great Recession of 2009, and performed well in the years after as Europe and the US jumped from crisis to crisis, a bit of underperformance to the global economy is not a great concern. And yet there are some aspects of the Australian economy that are troubling. Quarterly labour data released in June showed that 86 per cent of strong employment gains in the previous three months had come from four sectors, health care and social assistance, accommodation and food services, professional services and transport - or to put it another way, hospital workers, baristas, app developers and Uber drivers.
  • The issue is that these sectors tend to offer lower wages, and so it also partially answers the question on why Australia is experiencing such low wage growth. The exception is professional services, but most of those jobs are concentrated in NSW.
  • Additionally, the three highest paid sectors, mining, utilities and finance, are still shedding jobs.
Yearly Percentage Change
  • As long as the four performing sectors continue to perform, the unemployment rate is unlikely to become a big enough issue to require an interest rate cut from the Reserve Bank of Australia.
  • However, those sectors cannot continue to buoy employment figures indefinitely, and because the wages offered are lower, it will not give the inflationary pressure required to give the economy a boost.
  • At this point there are no candidates from other sectors that show the potential to step up and shoulder employment growth responsibility, and so the RBA is likely to keep interest rates at historical lows for quite some time. We continue to expect monetary policy status quo until at least late 2018.
  • Another interesting area to watch is housing. Population growth in Australia boomed during the mining boom and peaked in 2009, but it took housing supply almost 10 years to respond in a meaningful way, and when it did it overshot the mark, as population growth fell rapidly as economic conditions deteriorated during the global economic crisis.

At this point there are no candidates from other sectors that show the potential to step up and shoulder employment growth responsibility

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  • Add into the equation tightening lending standards, a rise in lending rates and data points that indicate heat coming off from the housing market - such as lower clearance rates, prices and finance commitments, and it all points to a sector in contraction.
  • We don't think the tightening in lending standards will be temporary, and our bank analysts see mortgage credit growth slowing from 7 per cent currently to 4 per cent in the second half of the year.
  • As the RBA Governor, Phillip Lowe, said in June, "there is a recalibration of expectations going on" as households come to grips with the combination of sustained low income growth, record household debt and house prices. The bottom line is a constrained outlook for households, which will keep the RBA patient and treading carefully despite the cautious optimism about the global economy.

    Simson is Citi's strategist

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