Heading into the New Year we have greater conviction that Australia’s pace of economic growth can accelerate in 2014. Therefore, we expect to see further signs of rebalancing in the economy, but only in a gradual fashion.
Capital spending by mining businesses on plant and equipment should hold up for the time being, given the high level of work yet to be done on committed projects (especially for LNG) and the continued strong commodity demand in China.
While we agree that growth is likely to remain sub-par at around 2.5%/year or slightly better, there could be upside risks to the RBA’s forecasts given the moderate pick-up in consumer spending, alongside the recovery in housing and improving global backdrop.
Business confidence is showing encouraging signs of a recovery, but conditions need to improve to ensure an upturn in non-mining business investment and hiring intentions. Unemployment is expected to peak at around 6.25% next year, according to RBA projections.
The Abbott Government’s focus on infrastructure investment should be a positive for non-mining activity, especially since improved transport links are critical for improving labour productivity, given weakening Australian income growth. Despite this, fiscal policy will likely be moderately contractionary in terms of the overall growth contribution next year.
We expect inflation to edge higher in 2014, towards the upper limit of the RBA’s target range of 2% to 3%. However, the subdued labour market outlook will contain inflation, offsetting price pressures arising from likely currency depreciation and rising housing prices. Housing inflation has continued to rise in 2013, raising concerns over an overheating housing market – increasing the hurdle for further RBA rate cuts.
Our base case scenario is that with global growth closer to trend next year, the Fed finally ‘tapering’ its monetary stimulus (placing downward pressure on the Australian dollar) and domestic monetary policy already stimulatory, the RBA will keep interest rates on hold at 2.5% until late 2014. Once the tightening cycle commences, rate increases are likely to be very gradual, given the protracted drag from declining mining capital expenditure and the benign inflation outlook.
This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 20 September 2013. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.