Australian stocktake


Principal Economist’s View


Amidst the market volatility over the past few weeks, it is important not to lose sight of underlying economic conditions. Globally, these conditions are strong, and while Australia lagged the global recovery in 2017, signs of improvement are emerging here as well.

Leading the way is a recovery in business investment. This week, NAB reported a surge in business conditions in January, reaching their second highest level since the financial crisis. The headwinds from the mining investment downturn are well and truly easing, as evidenced by Woodside Petroleum’s $2.5 billion equity raising announced this week to fund LNG expansion initiatives. While the development of Woodside’s Scarborough and Browse projects remain a distant prospect, increased confidence by resource companies to commit to exploration and feasibility expenditures is providing support to economic activity, particularly for business services.

Further supporting business activity is a continued ramp-up in infrastructure spending, particularly in Sydney and Melbourne. This is also having sizeable spillover benefits to the private sector, with contractors benefitting from the large volume of work. Some reports of capacity constraints are beginning to emerge in this space, encouraging increased investment in machinery and equipment and underpinning strong employment growth. Evidence of diminishing spare capacity in the Australian economy is starting to emerge, with the NAB survey of capacity utilisation rising in January to its highest level since 2008.

The improving outlook has given firms the confidence to take on additional employees. Over the year to January, employment in Australia has increased by 403,000; this is the most jobs added over a 12-month period since August 2005. While the industry breakdown of employment is only available with a lag, the most recent data from November suggests that around ¼ of the pick-up in employment over the past year has been within the construction sector, underpinned by the ramp-up in infrastructure activity and the ongoing elevated level of residential construction. Elsewhere, the roll-out of the NDIS, has seen employment in health care rise by around 100K over the past year, while employment in the retail industry has bounced back, advancing by almost 60K over the past year.

Although wage growth remains subdued, the improving employment trend has helped place a floor under consumer spending. Recent retail sales data revealed a bounce back in spending in the December quarter, with retail sales volumes advancing 0.9% over the quarter up from just 0.1% in the September quarter. Despite some clear challenges facing Myer, which culminated in the CEO’s departure this week, other retailers have been faring better over recent times. Nonetheless, while overall retail spending has stabilised, it remains below trend with annual growth in both sales volumes and sales values hovering around 2.5% over the year to the December quarter.

Housing market conditions are cooling in Australia, although recent developments remain consistent with a soft-landing. House prices have edged down by 0.7% since September, with the retracement mainly contained to Sydney, where prices have dropped 3.1% from their peak, and Darwin. In other capital cities, house prices have remained broadly flat, with the notable exception of Hobart, where supply shortages and increased migration continue to support strong price gains. Although housing construction activity has likely peaked, the resilience in building approvals during 2017 and the large pipeline of work yet to be completed, suggests the drop-off in activity is likely to occur in 2019 and 2020.

Overall, the improving global economy, solid public spending and recovery in business investment is supporting the Australian economy. With the consumer stabilising, albeit at a below-trend pace, the outlook for the Australian economy remains reasonable. We continue to expect Australian real GDP growth to improve from a 2.3% pace in 2017 to 2.7% in 2018 and 2.8% in 2019. Underlying inflation is expected to slowly edge higher, reaching 2.0% by H2 2018, due to pass-through from the recent increase in energy prices and a slow pick-up in wage growth. With GDP growth around trend and inflation moving back into the RBA’s target band, we expect the RBA will lift rates by 25 basis points in August 2018 with a further two hikes expected in 2019.  


Table 1: Financial market movements, 8 - 15 February 2018

Equity index



10-yr government bond



Foreign exchange



S&P 500





8.6 bps

US Dollar Index (DXY)



Nikkei 225





-1.4 bps




FTSE 100





2.9 bps









0.2 bps




S&P/ASX 200





3.5 bps




Source: Bloomberg

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