Quarterly Economic Outlook€¦ · economic growth has been picking up and labour markets have been strengthening, inflation has remained muted. Whether this remains the case is engaging

Quarterly Economic Outlook

KPMG Economics & Tax Centre—

April 2018

Global and Australian Forecasts

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Page

Executive summary 3

Global outlook 4

Global forecasts 10

Australian outlook 13

Australian forecasts 21

KPMG Economics & Tax Centre contacts 23

Contents


Executive SummaryGlobaleconomy

— Global economic conditions remain strong as we head into the second quarter of 2018 and this momentum is expected to continue through the year.

— Importantly, and different to recent years, is that this growth has also been widespread – and this pattern of widespread growth is forecast to be maintained into the short term.

— The major current development in the world economy at the moment is the imposition of tariffs by the United States on steel and aluminiumimports from 23 March 2018 and the potential application of tariffs on goods from China.

— Major advanced economies, led by Japan, Korea and Germany, have recorded stronger-than-expected growth in the last quarter. Although this momentum is projected to moderate, the current economic outlook for 2018 is still strong.

— Emerging market and developing economies including China, India and South Africa have also registered strong growth benefiting from increased world trade and a pick-up in investment.

— On balance, global growth is likely to remain robust going forward and KPMG Economics has revised up its forecast of global growth, with real GDP now expected to be 3.8% for both 2018 and 2019.

Australian economy

— The Australian economy grew by 0.4% q/q (seasonally-adjusted) in the December quarter of 2017 following an upwards revised 0.7% q/q growth in Q3 2017. On an annualised basis, the Australian economy grew at 2.4% y/y slower than the upwardly revised 2.9% y/y in Q3 2017.

— Household consumption expenditure was strong contributing 0.6 percentage points to GDP growth while government expenditure added a further 0.5 percentage points. Gross fixed capital formation contracted as private investment declined 2.1%, detracting 0.4% from GDP growth. Exports of goods and services declined 1.8% while imports of goods and services rose 0.5%. In aggregate, net exports had a negative contribution of 0.5% towards GDP growth.

— Headline inflation rose 1.9% y/y in Q4 2017 (0.6% q/q) with underlying inflation at around 1.8% y/y (trimmed mean basis). The RBA’s official cash rate (OCR) is accommodative at 1.5% and is expected to remain so for 2018.

— Looking ahead, KPMG Economics forecasts real GDP for the Australian economy to grow at around 2.9% for FY2018 and 2.6% for FY2019.

Australian forecasts

FY17 FY18 FY19 FY20 FY21 FY22GDP (Real) 2.0% 2.9% 2.6% 2.5% 2.7% 2.6%Inflation (1) 1.2% 2.2% 2.3% 2.6% 3.0% 3.1%Unemployment, % (1) 5.6% 5.5% 5.4% 5.2% 5.3% 5.4%$A/US$ (1) 0.751 0.776 0.776 0.777 0.779 0.782 (1) = Average through the year

Global Outlook


The global economy has started 2018 in pretty good shape. Global economic conditions remain strong as we head into the second quarter of 2018 and this momentum is expected to continue through the year. According to the IMF, global GDP is estimated to have grown by 3.7% in 2017 - 0.1% higher than projected in its October 2017 outlook.1 Importantly, and different to recent years, is that this growth has also been widespread – and this pattern of widespread growth is forecast to be maintained into the short term.

The major current development in the world economy at the moment – and is still evolving at the time of writing this report – is the imposition of tariffs by the United States on steel and aluminium imports from 23 March 2018 and the potential application of tariffs on goods from China. The Chinese Government has responded by announcing that should the US implement tariffs on Chinese imports, it would then apply tariffs to some US imports, including aircraft parts, pork products and soya beans. KPMG Economics has modelled the global macroeconomic impacts of various hypothetical ‘trade war’ scenarios2, with the results clearly showing it is important for the Australian and world economy‘s that this current tension does not escalate, or the hard-fought gains from liberalisation will be diminished, or worse still, lost.

Major advanced economies, led by Japan, Korea and Germany, have recorded stronger-than-expected growth in the last quarter. Although this momentum is projected to moderate, the current economic outlook for 2018 is still strong. Emerging market and developing economies including China, India and South Africa have also registered strong growth benefiting from increased world trade and a pick-up in investment. On balance, global growth is likely to remain robust going forward and KPMG Economics has revised up its forecast of global growth, with real GDP now expected to be 3.8% for both 2018 and 2019.

Global Outlook

1 January 2018 World Economic Outlook (WEO).2 https://home.kpmg.com/au/en/home/insights/2018/04/protectionism-consequences-for-australian-economy.html


Spare capacity in labour markets is diminishing and appears to be at full capacity in a number of advanced economies. Forward-looking indicators are also suggestive of a continuation of relatively healthy employment growth over the next few quarters although this is expected to slow as slack in the labour market tightens. While economic growth has been picking up and labour markets have been strengthening, inflation has remained muted. Whether this remains the case is engaging a lot of debate within the business community – at what point will higher economic growth and the absorption of the slack in the labour market result in faster earnings growth, and eventually higher inflationary pressures? If inflation does reignite, central banks are likely to respond with more aggressive monetary policy tightening to stabilise inflation and prevent the economy from overheating - an upside surprise in inflation is a key risk for 2018.

Among the major currencies, the U.S. dollar has weakened against a range of currencies following concerns over a widening U.S. budget deficit and proposed tariffs. The British pound, which has been relatively subdued against major currencies, rallied marginally towards the end of March on expectations that the Bank of England (BoE) will raise rates in May. The Euro is up slightly on a trade-weighted basis since the start of the year. The Australian dollar is trading around USD$0.78 against the U.S. dollar. Looking ahead, KPMG Economics expects the Australian dollar to settle around the USD$0.76-0.78 range in 2018. The latest RBA’s Index of Commodity Prices (preliminary estimates for March) indicated a decrease of 0.6% (SDR terms) monthly following a 5.6% increase in February. Global oil prices have increased slightly with Brent Crude and WTI trading between the US$60-65/bbl mark. Looking ahead, KPMG Economics forecasts oil prices to fluctuate between US$66-70/bbl for 2018.

Global Outlook


Globally, monetary conditions remain accommodative but a move towards gradual tightening is in play. The Federal Reserve has appointed a new Chair in Jerome Powell which is likely to see a continuation of monetary policy in the U.S. The Federal Open Market Committee (FOMC) recently raised the Federal Funds rate a further 25bps at its March meeting in 2018 – a move expected by markets. The current Fed Funds target rate now sits between 1.50% and 1.75%, and at least a further two 25bps hikes are expected for 2018. Importantly, the FOMC revised down its expectation of what the long-run policy rate should be for the U.S. from 3.5% to 2.75%.

The BoE’s Monetary Policy Committee voted at its March meeting in 2018 to keep its policy rate unchanged at 0.5% - although the majority narrowed to 7-2 from 9-0. The Committee also voted to maintain the stock of U.K. government bond purchase at £435 billion. The European Central Bank (ECB) held its benchmark interest rate at 0.0% and announced an extension of their asset purchase program until September 2018, or beyond, if necessary. The key ECB interest rates are expected to remain at present levels for an extended period of time. The Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) and have kept their policy parameters unchanged (1.5% and -0.10%) whilst the Bank of Canada raised its target rate by 25bps to 1.25% in January 2018.

Although risks to our growth forecast remain broadly balanced, the global outlook remains subject to both downside and upside risks. Risks to the downside include the possibility of financial vulnerabilities, increased protectionism, and rising geopolitical tensions. On the upside, global economic growth could exceed expectations in the short-term if fiscal stimulus has more of an impact than anticipated and the high level of sentiment carries over to increased investment and trade.

Global Outlook


The U.S. economy grew at an annual rate of 2.9% (seasonally-adjusted) in Q4 2017. Although healthy, this was lower than the 3.2% real GDP increase registered in Q3 2017. Growth was led by increases in consumer spending, exports, business and housing investment, and government expenditure. The unemployment rate remains at 4.1% in February although the latest print on headline inflation (PCE) at 1.65% is still below the Fed’s target rate. Looking ahead, domestic demand remains strong and tight labour market conditions are expected to feed into higher wage growth down the line. Further fiscal stimulus could be on the cards in 2018 with tax reform legislation that includes a permanent reduction in the corporate tax rate from 35% to 20% but protectionist measures in the form of tariffs will provide headwinds.

Growth rates for the Euro Area (EA) and the European Union (EU) beat expectations in 2017 as the transition from economic recovery to expansion continues. The EU expanded by 2.5%, its strongest performance since the Global Financial Crisis (GFC) in 2007, while the EA is estimated to have grown by 2.4%. On a quarterly basis, the EU and EA both grew by 0.6% (seasonally-adjusted) in Q4 2017 with growth being supported by improving business and consumer sentiment.

The unemployment rate in the EA was 8.6% (seasonally-adjusted) in January 2018, down from 9.6% in January 2017. The EU unemployment rate was 7.3% (seasonally-adjusted) in January 2018, down from 8.1% in January 2017. Member States with the lowest unemployment rates in January 2018 were the Czech Republic (2.4%), Malta (3.5%), and Germany (3.6%). The highest unemployment rates were registered in Greece (20.9% in November 2017) and Spain (16.3%). Inflation also remains subdued in Europe at about 1.4% for the 12 months to end December 2017 – with food and transport price inflation the main drivers.

Global Outlook


In Germany, Olaf Scholz is to be the next Finance Minister replacing Wolfgang Schaeuble who now presides over the Bundestag, although no substantial shift in fiscal policy is expected from this change. The Italian elections in March resulted in no clear winner with neither the centre-right coalition, the centre-left, nor the anti-establishment winning a majority of seats adding to the political uncertainty in Europe. Looking ahead, despite the possible headwinds from the Brexit negotiations, economic growth is Europe is forecast to remain strong in 2018.

Economic growth in the U.K. has remained modest at 0.4% (seasonally-adjusted) in Q4 2017 – down from an upwardly revised 0.5% in Q3 2017. Gross capital formation was the largest contributor to GDP growth while household expenditure also contributed. Net trade had a negative contribution to growth in the quarter. CPI inflation stood at 2.5% (y/y) in February 2018, down from 2.7% in January 2018. The strongest contributor to the inflation rate was footwear while the largest downward pressures came from transport and food prices. The Monetary Policy Committee at the Bank of England (BoE) have kept interest rates unchanged at 0.5% in its March monetary policy meeting in 2018. The bank’s quantitative easing programme also remained unchanged - capped at £435 billion on its asset purchases. Importantly, the BoE upgraded its forecast for U.K. economic growth by 0.1% to 1.8% for 2018. Market participants and economists currently expect the BoE to raise rates one to two times this year.

Confidence in the Japanese economy continues as Japan registered economic growth for an eighth consecutive quarter with GDP coming in at 0.4% (seasonally-adjusted) q/q (1.6% annualised) in Q4 2017. This was significantly stronger than the preliminary estimate of 0.1% growth. Economic activity was supported by household consumption and private business spending.

Global Outlook


Looking ahead, momentum is likely to continue with the BoJ’s latest Tankan survey reporting an improvement in overall business conditions and the confidence index among small and medium size businesses at the highest level since 1991. The unemployment rate dropped to 2.4% in December 2017 (ahead of expectations and the lowest rate since 1993) and there are signs that upward pressure on prices is beginning to materialise. Consumer prices rose 1.4% (y/y) in January 2018 – the highest rate since March 2015 – driven by increases in the price of food, clothes and footwear. Core inflation remained at 0.9%. The Bank of Japan is set to keep its monetary stimulus unchanged for the foreseeable future, with the key short-term interest unchanged at -0.1%.

GDP growth in China grew 6.8% y/y in Q4 2017 – the same rate as the previous quarter but 0.1% ahead of market expectations. Exports, industrial production and a strong housing market were the main drivers of economic growth in China in the last quarter of 2017. Consumer prices rose 2.9% y/y in February 2018 – the highest inflation rate since November 2013 – driven by food prices and non-food costs. The renminbi has appreciated by around 7% against the USD since the beginning of 2017, in part driven by Chinese authorities refraining from active FX market interventions, and also in part from the introduction of tighter capital controls. For 2018, the Chinese authorities have targeted the economy to grow by around 6.5% - lower than the published growth rate of 6.9% in 2017. This is expected to be met along with a continued focus on containing financial risks and credit expansion.

India’s GDP growth advanced 7.2% (seasonally-adjusted) in Q4 2017 – well above an upwardly revised figure of 6.5% (seasonally-adjusted) in the previous quarter. Inflation rose 5.1% (y/y) in January 2018 – below the 5.2% high in December 2017. The Reserve Bank of India (RBI) kept its benchmark rate unchanged at 6% and reverse repo rate at 5.75%.

Global Outlook


Annual InflationYear End December 2017 2018 2019 2020 2021 2022

OECD 2.2% 2.4% 2.2% 2.2% 2.1% 1.9%

Americas

Brazil 2.9% 4.4% 5.8% 6.4% 6.3% 5.8%

Canada 1.8% 1.8% 1.3% 1.7% 2.0% 2.0%

Latin America 5.5% 3.9% 5.2% 5.1% 4.5% 3.9%

Mexico 6.6% 5.0% 3.4% 3.6% 4.0% 4.1%

USA 1.8% 2.4% 2.2% 2.2% 2.0% 1.7%

Europe

EMU 1.4% 1.7% 1.6% 1.6% 1.6% 1.6%

France 1.2% 1.4% 1.4% 1.5% 1.6% 1.5%

Germany 1.6% 1.9% 1.7% 1.7% 1.8% 1.9%

Greece 0.9% 1.5% 1.6% 1.9% 2.2% 2.3%

Ireland 1.4% 2.0% 1.8% 1.8% 1.7% 1.7%

Italy 0.8% 1.6% 1.5% 1.5% 1.6% 1.6%

Russian Federation 3.3% 3.9% 4.6% 4.4% 4.2% 4.1%

UK 2.4% 2.7% 2.5% 2.1% 2.3% 2.3%

Africa 8.7% 9.9% 7.9% 7.3% 6.5% 5.7%

South Africa 4.8% 5.4% 5.9% 5.5% 4.4% 3.4%

Middle East 10.0% 9.3% 7.2% 5.7% 4.4% 3.4%

Asia

China 1.8% 2.5% 2.9% 3.0% 2.7% 2.7%

East Asia 3.1% 5.1% 5.1% 4.8% 4.5% 4.2%

Hong Kong 3.3% 2.7% 2.3% 2.6% 2.8% 3.1%

Indonesia 3.5% 5.4% 4.2% 4.1% 4.0% 4.0%

India 4.2% 4.5% 4.6% 4.9% 5.0% 5.0%

Japan -0.1% 1.1% 1.2% 1.3% 1.3% 1.4%

Singapore 0.9% 1.6% 1.9% 2.1% 2.6% 2.9%

South Korea 1.9% 2.6% 1.7% 1.7% 1.7% 1.8%

Taiwan -0.1% 0.0% 0.7% 1.4% 1.8% 2.0%

Vietnam 4.0% 5.5% 6.0% 5.3% 3.9% 3.9%

Oceania

New Zealand 1.1% 2.7% 2.5% 2.1% 2.0% 2.3%

Growth in Real GDPYear End December 2017 2018 2019 2020 2021 2022

OECD 2.5% 2.5% 2.2% 2.0% 1.8% 1.8%

Americas

Brazil 1.0% 1.7% 2.0% 2.0% 2.1% 2.1%

Canada 2.9% 2.7% 2.2% 1.9% 1.6% 1.5%

Latin America 2.5% 3.4% 3.2% 2.9% 2.6% 2.3%

Mexico 2.2% 2.2% 2.5% 2.7% 2.8% 2.9%

USA 2.2% 2.6% 2.5% 2.1% 1.9% 1.9%

Europe

EMU 2.5% 2.2% 1.8% 1.6% 1.4% 1.3%

France 1.9% 1.9% 1.8% 1.7% 1.7% 1.6%

Germany 2.6% 2.4% 1.8% 1.5% 1.3% 1.2%

Greece 1.3% 2.3% 2.2% 2.1% 2.1% 2.2%

Ireland 6.6% 4.1% 2.6% 2.8% 2.1% 1.8%

Italy 1.5% 1.4% 1.3% 1.2% 1.1% 1.1%

Russian Federation 1.9% 2.0% 2.4% 2.3% 1.8% 1.7%

UK 1.9% 1.5% 1.6% 1.8% 1.9% 1.9%

Africa 1.7% 2.6% 3.7% 3.9% 3.9% 3.9%

South Africa 1.1% 1.4% 1.4% 2.0% 2.4% 2.6%

Middle East 2.7% 3.4% 3.4% 3.2% 3.0% 2.8%

Asia

China 6.8% 6.4% 6.3% 5.9% 5.8% 5.7%

East Asia 4.3% 5.4% 4.7% 4.5% 4.4% 4.3%

Hong Kong 3.5% 2.4% 1.7% 2.2% 2.0% 2.3%

Indonesia 4.9% 5.5% 5.1% 4.4% 4.3% 4.2%

India 6.7% 7.3% 7.4% 7.5% 7.4% 7.2%

Japan 1.8% 1.3% 0.8% 0.8% 0.8% 0.9%

Singapore 3.4% 3.4% 1.8% 2.8% 3.6% 4.0%

South Korea 3.1% 3.4% 3.6% 3.5% 3.6% 3.7%

Taiwan 2.6% 2.2% 2.7% 3.0% 3.1% 3.1%

Vietnam 6.7% 6.7% 5.7% 5.8% 5.0% 5.0%

Oceania

New Zealand 2.8% 3.3% 3.2% 2.5% 2.0% 2.0%

World 3.7% 3.8% 3.8% 3.6% 3.5% 3.4%

Global Outlook


Australian Outlook


The Australian economy grew by 0.4% q/q (seasonally-adjusted) in the December quarter of 2017 following an upwards revised 0.7% q/q growth in Q3 2017. On an annualised basis, the Australian economy grew at 2.4% y/y slower than the upwardly revised 2.9% y/y in Q3 2017.

The softer GDP results for the quarter in part reflects a temporary drop in exports, which contracted by 1.8% to be only 0.8% above the level of a year ago. Net exports consequently had a negative influence on GDP growth for the quarter, reducing economic output by 0.5% in Q4 2017 and 1.3% over the past year. Exports, however, are expected to improve in 2018, led by LNG as new capacity comes on stream.

Household consumption expenditure was strong contributing 0.6 percentage points to GDP growth while government expenditure added a further 0.5 percentage points. Gross fixed capital formation contracted as private investment declined 2.1%, detracting 0.4% from GDP growth. Exports of goods and services declined 1.8% while imports of goods and services rose 0.5%. In aggregate, net exports had a negative contribution of 0.5% towards GDP growth.

Headline inflation rose 1.9% y/y in Q4 2017 (0.6% q/q) with underlying inflation at around 1.8% y/y (trimmed mean basis). Inflation remains contained and under the RBA’s medium-term target of 2.5%. The RBA’s official cash rate (OCR) is accommodative at 1.5% and is expected to remain so for 2018.

Looking ahead, KPMG Economics forecasts real GDP for the Australian economy to grow at around 2.9% for FY2018 and 2.6% for FY2019.

Australian Outlook


Government expenditure grew by 1.9% q/q (seasonally-adjusted) in Q4 2017, down from -1.4% q/q (seasonally-adjusted) in Q3 2017. This was driven by an increase in non-Defence expenditure (0.8% q/q) while Defence expenditure declined 7.8% q/q. National government expenditure increased 3.1% q/q in Q4 2017 (up from -0.1% q/q in Q3 2017) and State and local government spending grew by 0.7% q/q (down from 0.4% q/q in Q4 2017).Taxation revenue increased by 13.4% from $117.5 billion in Q3 2017 to $133.3 billion in Q4 2017.

The underlying cash balance for the financial year to 28 February 2018 was a deficit of $19.75 billion, $8.01 billion lower than the 2017-18 MYEFO profile deficit of $27.77 billion. The net operating balance for the year to 28 February 2018 was a deficit of $15.30 billion - $9.80 billion lower than the projected figure of the 2017-18 MYEFO update.

The Federal Government’s debt-to-GDP position remains at around 40%. As at December 2017, the total face value of Commonwealth Government Securities (CGS) on issue stood at $524 billion, up from $508 billion in September 2017.

The Australian 2018-19 Federal Budget is scheduled for May 8.

Government


The Finance and Insurance Services industry continues to be the largest industry, accounting for 9.6% of the economy’s Gross Value Added. Construction (8.0%), Health Care and Social Assistance (7.9%), Manufacturing (6.3%) and Mining (6.3%) make up the top five largest industries within the Australian economy, accounting for just over 38% of GVA. GVA growth in Q4 2017 was less broad-based with 14 of the 20 industries recording positive growth for the quarter. Growth was driven by Information, Media and Telecommunications (2.9% q/q), Rental Hiring and Real Estate Services (2.5% q/q), Arts and Recreation (2.2% q/q), and Mining (1.3% q/q). Agriculture, Forestry and Fishing (-2.7% q/q), Manufacturing (-1.0% q/q), Electricity, Gas, Water and Waste Services (-0.8% q/q), Wholesale Trade (-0.2% q/q), Transport, Postal and Warehousing (-0.8% q/q), and Administrative and Support Services (-0.6% q/q) all experienced contractions in GVA over Q4 2017.

According to the February 2018 ABARES Australian Crop Report, total area planted to summer crops is estimated to have increased by 2% in 2017-18 to 1.3 million hectares. Total winter crop production is projected to have decreased by 36% in 2017-18 to 37.8 million tonnes. Winter production in 2017-18 is estimated to be 6% above the 10 year average to 2015-16. For the major winter crops, wheat production is forecast to decrease by 38% to 21.2 million tonnes, barley production is forecast to decrease by 33% to 8.9 million tonnes and canola production is forecast to decrease by 15% to 3.7 million tonnes.

Total summer crop production is forecast to increase by 12% to around 4.3 million tonnes. The 2017-18 production forecast is a downward revision of 9.0% from ABARES forecast published in the December 2017 edition of the Australian Crop Report. For the major summer crops, grain sorghum area is forecast to increase by 26% to 501,000 hectares, cotton area is forecast to decrease by 10% to 500,000 hectares and rice area is forecast to decrease by 2% to 80,000 hectares.

Production


Household final consumption expenditure grew 1.0% q/q (seasonally-adjusted) in Q4 2017. This was driven by Health (3.4% q/q), Transport services (2.3% q/q), Hotels, cafes and restaurants (2.9% q/q), and Recreation and culture (2.0% q/q). Declines in household consumption expenditure was led by declines in Electricity, gas and other fuel (-3.1% q/q), and Food (-0.7% q/q).

Retail trade growth increased by 0.1% (seasonally-adjusted) in January 2018, following a 0.5% fall in December 2017. On a quarterly basis, retail trade grew by 0.9% in Q4 2017. The majority of categories recorded positive growth in the December quarter of 2017 with Household goods retailing (3.4%) leading the way. Growth was also driven by Department stores (2.3%) and Clothing, footwear and personal accessory retailing (2.1%). The largest quarterly decline was observed in the Food retailing (-1.2%) and Other retailing (-0.6%) category.

One feature of the domestic economy is the challenge households currently have trying to balance their budgets in a low wage growth environment. Compounding this situation is high household debt, which is now running at about 190% of household income.

Consumer sentiment, as measured by the Westpac-Melbourne Institute Index of Consumer Sentiment, declined 2.3% in February to 102.7 from 105.1 in January. While this was slightly less optimistic, the survey was conducted during a bout of market volatility in early February. Overall, the number of pessimists still outnumber the number of optimists within the 1,200 survey respondents. According to the survey, economic conditions for the next five years declined (0.7%) from the previous month although the ‘time to buy a major household item’ sub-index rose by 0.9%. Consumers’ expectations for house prices increased by 4.8% in February.

Consumption


Private investment in Australia fell 2.1% q/q (seasonally-adjusted) in the December quarter of 2017. Expenditure on building and structures declined 2.1% q/q (seasonally-adjusted) but expenditure on equipment, plant and machinery increased 2.2% q/q (seasonally-adjusted) in Q4 2017. Total Gross Fixed Capital Formation in Australia also decreased 2.2% (seasonally-adjusted) in Q4 2017.

The number of dwelling approvals rose by 17.1% m/m (seasonally-adjusted) in January 2018, driven by a rise in ‘private dwellings excluding houses’ (18.1%). Dwelling approvals declined in South Australia (-1.0%) but increased in all other states and territories with New South Wales (29.7%), Victoria (21.0%), and Queensland (7.0%) leading the way.

The property market has started to cool, most noticeably in Sydney although Melbourne is heading in the same direction – this is in line with our predictions presented in our report in June of last year. The HIA New Home Sales indicator fell modestly in February with sales of detached houses declining 0.7% (seasonally-adjusted) following a 2.1% (seasonally-adjusted) reduction from the month prior.

The NAB Business Confidence Index fell 2 points to 9 in February, from 11 in January 2018. The Business Conditions sub-component of the Index, however, jumped 3 points to 21 in February 2018 – up from 18 the month prior. Gains in the Index were driven by employment conditions, trading conditions and profitability which increased from 6 to 16, 25 to 27 and 19 to 21, respectively.

Services and Manufacturing PMIs are still in the expansionary range (above 50). The AIG Performance of Manufacturing Index in Australia declined to 57.5 in February 2018 (from 58.7 in January 2018) while the Australian Performance of Services Index decreased to 54.0 in February 2018 from 54.9 in January 2018.

Investment


The labour market in Australia remains healthy. Employment increased strongly by 17,500 (seasonally-adjusted) persons from January to February 2018 bringing the total number of employed persons to 12,480,500. The proportion of full-time employed persons surged by almost 65,000 with the domestic labour force now comprising around 8.53 million full-time employed persons (approximately 69% of the total employed labour force) and 3.95 million part-time employed persons (approximately 31% of the total employed labour force).

The unemployment rate rose slightly to 5.6% (seasonally adjusted) in February 2018 from 5.5% the month prior. The number of unemployed persons looking for full-time work increased 13,600 to 512,900 and the number of unemployed persons only looking for part-time work decreased 4,700 to 221,200. Monthly hours worked in all jobs also increased by 1.2% to 1,734.1 million hours.

The labour force participation rate increased by 0.1 percentage points to 65.7% in the month of February 2018 – the highest it has been since 2011. This is a positive signal for the labour market signalling the return of discouraged workers and first-time participants into the labour force. Wage growth, once again, remains relatively subdued. The Wage Price Index rose by 2.1% y/y (seasonally-adjusted) in the December quarter of 2017. On a quarterly basis, wages rose 0.6%, with wages in the private sector growing buy 0.5% and those in the public sector increasing by 0.6%.

The ANZ Job Advertisements Series showed a decrease of 0.3% m/m in the number of job advertisements in February 2018, although this was from a decade-high of 6.2% in the month of January 2018. On an annualised basis, job advertisements recorded an increase of 13.3%.

KPMG Economics forecast for the unemployment rate to remain in a band between 5.2% and 5.5% for 2018.

Labour market


The Australian economy posted a current account deficit of $14.02 billion in Q4 2017, an increase of 3.0 billion from the previous quarter. The trade surplus was $1.06 billion in January 2018 from a downwardly revised deficit of $1.15 billion in December 2017. This was the largest trade surplus since September 2017 as the value of exports increased to $33.92 billion in January 2018 (from $32.53 billion in December 2017) while imports decreased to $32.87 billion in January 2018 from $33.68 billion the month before.

Export of goods contributed $26.69 billion while export of services contributed $7.24 billion to the trade balance. Imports of goods and services declined 2.4% to $32.87billion, with imports of goods contributing $25.38 billion and import of services contributing $7.49 billion.

Demand for Australian exports are expected to remain strong over the next quarter supported by healthy global industrial growth and demand for commodities. For the month of February 2018 (preliminary estimates), the RBA’s Index of Commodity Prices indicate an increase of 1.8% (SDR terms), following a strong increase of 7.7% in January 2018. Over the year, the index has decreased by 1.0% in SDR terms and 3.2% in Australian dollar terms. Australia’s Terms of Trade (ToT) increased to 115.10 index points in Q4 2018 from 114.70 in Q3 2017.

The Australian dollar has depreciated slightly against the U.S. dollar since Q4 2017, and is currently trading at around USD 0.77c. On a trade-weighted basis, the Australian dollar is also marginally lower since Q4 2017 with the Index at around 63.6 at the end of February 2018 compared with 64.9 in December 2017. KPMG Economics forecasts the AUD/USD exchange rate settling around the USD$0.76-0.78 range in 2018.

Net exports


Forecast AssumptionsChanges in key assumptions impacting KPMG’s Economics forecasts since November 2016 include:

Global

— A rise in 10-year bond yields in most jurisdictions through 2017;

— A tightening in the spread between sovereign bonds and corporate bonds, suggesting the margin for corporate borrowing compresses;

— Oil prices stabilising to trade in a tight range of US$66/bbl to $70/bbl until the end of 2018;

— Equity prices to retreat from recent high’s.

Australia

— Residential construction activity to soften in 2017 and 2018 due to a moderation in non-housing construction;

— Non-mining business investment to continue to steadily rise, although the decline in mining investment will continue to swamp aggregate investment such that negative growth remains in FY17;

— Household consumption activity to be limited by high debt levels, anemic wages growth and moderate employment growth;

— Limited fiscal reforms in Australia, thereby keeping the effective corporate tax rate and effective personal income tax rate the same as in FY17, with government spending also to be maintained at levels forecast in the recent MYEFO statement.


Australian OutlookFY17 FY18 FY19 FY20 FY21 FY22

GDP (Real) 2.0% 2.9% 2.6% 2.5% 2.7% 2.6%Private Consumption 2.4% 2.8% 2.8% 2.6% 3.1% 2.6%Investment

Business -6.7% 9.6% 3.8% 4.6% 5.1% 3.6%Housing 2.2% -3.2% -1.3% -1.2% 6.8% 0.0%

GovernmentConsumption 3.8% 2.3% 0.9% 0.8% 1.5% 1.7%Investment 16.0% -1.8% -4.3% -3.5% -0.3% 0.7%

Total domestic demand 2.0% 2.8% 2.0% 2.0% 3.2% 2.3%Export volumes 5.4% 7.7% 7.2% 6.5% 1.7% 4.4%Import volumes 4.8% 6.7% 4.2% 3.9% 4.0% 3.2%Inflation (1) 1.2% 2.2% 2.3% 2.6% 3.0% 3.1%Real Personal Disposable Income 0.9% 2.8% 2.8% 3.0% 3.0% 2.8%Unemployment, % (1) 5.6% 5.5% 5.4% 5.2% 5.3% 5.4%Government Balance as % of GDP -1.3% -1.6% -1.1% -0.8% -0.7% -0.9%Govt. debt as % of GDP 44.9% 45.4% 44.7% 43.5% 41.9% 40.4%Current account as % of GDP -1.8% -1.4% -0.5% -0.5% -1.5% -1.4%$A/US$ (1) 0.751 0.776 0.776 0.777 0.779 0.782 Terms of Trade (1) 97.0 96.2 95.3 95.0 94.6 94.0 (1) = Value at end of the year

(1) = Value at end of the year


KPMG Economics & Tax Centre

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Brendan RynnePartner, Chief EconomistMelbourneTel: 03 9288 [email protected]

Grant Wardell-JohnsonLead Tax PartnerSydneyTel: 03 9288 [email protected]

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Documents

Quarterly Economic Outlook€¦ · economic growth has been picking up and labour markets have been strengthening, inflation has remained muted. Whether this remains the case is engaging