7 POINTS FROM JULY'S DELOITTE BUSINESS OUTLOOK

Written on the 18 July 2016 by James Perkins

7 POINTS FROM JULY'S DELOITTE BUSINESS OUTLOOK

DELOITTE Access Economics released its monthly Business Outlook today. It puts Brexit in perspective for Australia and explains how Australia is growing, despite some strong headwinds. Business News Australia has broken the Deloitte report down to seven points:

China matters more than Brexit

"Although a renewed burst of credit creation has goosed China's growth, the further transitioning in its economy away from an overreliance on construction and debt has only been delayed. Both history and economics suggest it won't be denied."

Australia's growth is a trend, but challenges remain

"Low interest rates have kept retail healthy and sent the building of new housing to record highs, while the lower $A has fired up tourism and protected the markets of our miners, farmers and manufacturers.  Even better, that good news on growth means good news on jobs too. So there's a lot to like.  And a lot to be proud of too.  But the challenges remain large. Our dependence on China and its tricky transition remains huge, and our living standards continue to fall from the highs reached when China was booming and coal and iron ore prices were at record highs."

Inflation may not be dead, but it is giving a good impression of it

"The world spent the last decade and more building factories, yet the global recovery from the GFC has been patchy and protracted. That has seen supply outstrip demand growth, adding to technological developments that are also limiting price pressures.  We don't or don't yet see these trends as permanent, but they'll last long enough to see inflationary expectations in Australia undergo yet another round of 'lower for longer', taking the outlook for wage growth along with them."

Interest rates are also lower for longer

"On top of the reasons that are keeping interest rates low worldwide, Australia has an extra reason to see rate cuts:  the growth hit from gas projects wrapping up is specific to us rather than the rest of the world, and so gives a reason to watch for rate cuts here. But Aussie families are now the world's most heavily indebted, and we're still taking on debt faster than our incomes are growing.  Resultant vulnerabilities mean the RBA may yet cut rates again, but only reluctantly."

The Australian dollar will continue to slide

"A continuing bout of global currency wars combined with Chinese stimulus has seen the $A climb in 2016.  And underlying volatility in markets could see it climb further.  But its fundamentals remain soft, and we continue to see a slide in the $A in 2017."

Australia's dysfunctional politics means reforms will be stifled

"In times past Australia rose to the challenge of adversity, embracing change when we needed to.  But the election saw all major parties effectively say they wouldn't recognise the mandate of the winner.  That guaranteed more gridlock even before the cliff-hanger of an election. 

Governments will continue to struggle to achieve much needed reforms, as those reforms will almost always be unpopular.  In turn, that says reform proposals won't make it through the Senate, or be shelved before even getting to the Senate."

The mining and services sector still driving growth

"Property services, finance and retail have therefore been strong for some time now, buoyed by low interest rates.  The impressive performance in sectors such as international education and recreation is testament to the continued strength of the Chinese consumer, plus some added 'fairy dust' from the more competitive Australian dollar.

"Health care keeps-on-keeping-on.  And here's a turn up for you:  the pace of growth in the nation's public sector which we forecast to be Australia's second fastest growing sector in 2016, behind only mining is back to being a big driver of the economy as a whole. 
Manufacturing sector activity is still shrinking, as it has so done consistently since 2010.  And engineering construction work related to mining will continue to fall away fast, while the residential construction boom is getting closer to its peak."


Author: James Perkins Connect via: Twitter LinkedIn

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