The unemployment rate surprisingly fell in 2017, while wages continued to grow at a record low rate.
Immigration picked up, giving Australia one of the highest rates of population growth in the developed world.
ABC News surveyed six of Australia’s top economists to get their views on the domestic outlook for 2018.
For most of the economists surveyed, this year looks like it might be a bit better than last — but there are major risks and the economy could easily be blown off course.
The economy is generally expected to grow around 2.75 per cent, according to several of Australia’s chief economists.
But with a population growing at 1.6 per cent, that’s not a particularly strong result.
|2018 economic forecast|
|Michael Blythe,||Commonwealth Bank||“We expect the economy to grow by 2.75 to 3 per cent in 2018. Such an outcome is around our best guess at Australia’s potential growth rate.||“The year-average forecast conceals what we expect to be an improving trend.”|
|Paul Dales,||Capital Economics||“I think the Australian economy is still a 2.5 per cent economy rather than a 3 per cent one. The mining bust is pretty much over and businesses are starting to open their wallets.||“But this is happening as households are shutting theirs, as the weaker housing market is weighing on activity, and as economic growth in China has started to slow.||“So 2018 will probably be another year in which economic growth is not weak but neither will it be as good as most expect.”|
|Sally Auld,||JP Morgan||“We expect next year to be better, as capital spending continues to heal.||“However, we still expect the economy (domestic demand) to grow below potential, which makes it unlikely that the labour market tightens sufficiently to bring core inflation back towards target.||“Further, we see stretched household balance sheets bringing headwinds to consumption, and heightened risks to the housing market. This will keep the RBA watchful on growth, in particular.”|
|Su-Lin Ong,||RBC||“We expect GDP to firm to 2.75 per cent in 2018, around trend, underpinned by stronger net exports, public spending and a small improvement in business investment as momentum in global growth continues.||“Weaker consumption and a softer housing market will, however, temper activity with private final demand likely to be soft.”|
|Paul Brennen,||Citi Australia||“Around trend, about 2.75 per cent, but mixed across sectors with household spending subdued and business spending in recovery mode and infrastructure spending booming.”|
|Ric Deverell,||Macquarie Bank||“Employment growth will remain robust, with investment recovering — both mining and non-mining is looking better.||“Government spending, both consumption and infrastructure, will also be strong.”|
Biggest domestic risk is housing and debt
With signs of a serious slow down in house price growth, the risk now is that a bubble has been formed which could blow.
Only one of the experts surveyed for the ABC News 2018 housing outlook forecast anything approaching a crash this year, but with household debt at extraordinarily high levels and wages growth at record lows, it’s a potential powder keg.
|Domestic risk forecast|
|Paul Dales,||Capital Economics Australia||“The risk is that 2018 could finally be the year that the housing boom turns to bust.||“Our forecast is that there will be a soft-landing, where prices occasionally fall and occasionally rise but are broadly stable during the year.||“But while the chances of a rebound in house price inflation appear very slim, the possibility that prices fall by 5 per cent or more is greater.”|
|Paul Brennan,||Citi Australia||“Positive risk is the surprisingly stronger commodity prices on still accelerating global growth.||“Negative risk is house price deflation as debt burden and oversupply and low wage growth hit home.”|
|Michael Blythe,||Commonwealth Bank||“The combination of weak wages growth at a time of high household debt levels will constrain the consumer.||“Strong population growth means the expected residential construction downturn doesn’t happen.”|
|Sally Auld,||JP Morgan||“Domestically, weak consumption.||“The Australian consumer offers little cushion for a central bank that requires trend or better growth in order to facilitate target-consistent inflation outcomes.||“This places greater pressure on other components of domestic demand, such as government investment (infrastructure) and private capex, to deliver robust outcomes.”|
Despite the unemployment rate falling to 5.4 per cent in 2017, and the creation of a large amount of full-time jobs, there has actually been very little change in the number of Australians out of work.
Consensus from several chief economists seems to be that there will be little improvement next year.
“We do not expect employment generation next year to repeat the stellar pace of 2017,” said RBC’s chief economist Su-Ling Ong.
“But modest downward pressure will remain on the unemployment rate taking it to just above 5.25 per cent by the end of 2018.”
That record low wages growth and low inflation mean most economists think rates will be on hold for most of, if not all of 2018.
Macquarie, Citi, JPMorgan, RBC, Capital Economics say no change next year while CBA says we might see one rate rise in November next year.
It’s the problem area for the Australian economy and there seems to be very little chance that workers will see decent pay rises next year.
|Paul Dales,||Capital Economics||“Wage growth will probably edge up, but any rise will be underwhelming.||“The big picture is that Australians need to get used to the idea that 2018 will be another year of unusually low wage growth. It shouldn’t really be a surprise to anyone.||“Wage growth is pretty much where it should be when you take into account the large amount of spare capacity in the labour market as indicated by the underutilisation rate.”|
|Paul Brennan,||Citi Australia||“Wages are unlikely to pick up much during the year given the experience in overseas markets who have much lower unemployment rates than in Australia.||“This is due to globalisation of product and labour markets, ample spare capacity in labour market as evidenced by rebound in labour force participation rates, and the legacy of the global financial crisis.”|
|Michael Blythe,||Commonwealth Bank||“Tightening labour market to put some modest upward pressure on wages growth.”|
|Sally Auld,||JP Morgan||“Probably very little — wages growth should finish the year somewhere between 2 and 2.5 per cent, continuing the theme of stabilisation at low levels, largely because there is still significant excess capacity in the labour market.||“Underemployment or underutilisation of labour both remain elevated.”|
|Ric Deverell,||Macquarie Bank||“Wages growth in Australia has troughed. But it will take some time for any material rebound to emerge.”|
What to watch overseas in 2018
The two biggest threats to the global economy seem to be that the US overheats, China underperforms or the Italian election throws a curve ball.
|Paul Dales,||Capital Economics||“There will be two. First, the Fed will probably raise interest rates by 100 basis points next year, which would be more hikes than most people expect.||“Second, economic growth in China will probably be weaker than is widely expected.”|
|Michael Blythe,||Commonwealth Bank||“The many and varied geopolitical issues in play, US tax policy, Italian elections, Chinese corporate debt.”|
|Ric Deverell,||Macquarie Bank||“We will be watching the US very closely in 2018.||“Our central scenario is that growth will be good, but that long yields will remain relatively low (kept down by global factors including negative euro area rates and a zero 10-year yield in Japan).||“With unemployment already very low, however, the risk is that the tax package drives a general reflation, which could see global yields move higher, putting pressure on risk assets.”|
|Sally Auld,||JP Morgan||“Growth in China. In the US, the risk of a spike in inflation which forces the Fed onto a more aggressive trajectory with rates.||“Geopolitical risks are North Korea and Iran withdrawing from the nuclear arrangement.||“Italian elections are unlikely to be too problematic, and worse news on Brexit is likely to be contained to the UK.”|
|Paul Brennan, Citi Australia||“Trump tax package could overstimulate US economy, risking higher longer term interest rates and a surging US dollar.”|