FORECASTER SEES THREE MORE YEARS OF PAIN

Written on the 31 August 2016 by Jess Lamb

FORECASTER SEES THREE MORE YEARS OF PAIN

IF YOU thought the last couple of years were tough then get used to it, says BIS Shrapnel.

The economic forecaster is tipping Australia's economic growth to weaken each year over the next three years, buffeted by a stubbornly high dollar and continued structural change in the economy.

BIS Shrapnel's Long Term Forecasts: 2016-2031 report says GDP growth will ease to 2.8 per cent in FY17, with the economy supported by existing mining projects, including LNG, coming to fruition, solid household spending and a lift in national infrastructure spending.

"However, growth will again weaken over the subsequent two years as mining investment continues to decline, as residential building runs out of steam and falls sharply, and as parts of non-dwelling building plateau," says Richard Robinson, senior economist at BIS Shrapnel.

"The main contributor to growth at that time will be rising public infrastructure investment.

"Accordingly, we expect employment growth to slow and households to react to slower jobs growth and weaker residential property prices by reeling in discretionary spending.

"Consequently, annual GDP growth is forecast to ease to 2.6 per cent in FY18 and slow to a weak 2.1 per cent in FY19.

"Meanwhile, soft growth in output, wages, employment and household incomes will continue to contain underlying inflation despite the fall in the dollar."

BIS Shrapnel sees some light in the early 2020s when it forecasts a reasonable rise in government investment and housing construction.

These combined factors are expected to result in annual average growth around the long-term average over the five years to 2026, easing slightly over the five years to 2031 as population growth eases and as the baby-boomers move into retirement en-masse.

Meanwhile, BIS Shrapnel says the Aussie dollar remains too high and needs to fall further to stimulate a sustained recovery in the non-mining sector.

This in part is driven by Australia's status as a safe haven for investments, leading to a strong inflow of capital.

BIS Shrapnel says this will be offset by the US Federal Reserve should it start lifting interest rates.

It also forecasts further cuts in the cash rate by the Reserve Bank of Australia in FY18, which will put more downward pressure on the Aussie dollar.


Author: Jess Lamb

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