Australian economy likely to continue expansion in line with potential growth rate in 2017–18, says Scotiabank

Australia’s near-term economic growth prospects are favourable, yet activity is partially supported by transitory factors in the external sector. The mining boom has moved from an investment phase to a production phase, with higher export volumes providing a temporary boost to the economy.

A pick-up in commodity prices from year-earlier levels is supporting Australia’s terms of trade, corporate profits, and output growth. However, we assess that the medium-term pricing environment for LNG, iron ore, and metallurgical coal is unlikely to improve.

Finally, Australian exporters are benefitting from the recent stabilization of the Chinese economy, a destination for almost 30 percent of Australia’s exports; in the medium-term, however, they remain vulnerable to China’s softer commodity import demand. The external sector growth factors play a key role in smoothing out the Australian economy’s ongoing rebalancing toward non-mining-based activity.

Household spending will remain an important source of growth; low interest rates, rising household net wealth and gradually rising employment are supporting consumer spending, yet muted wage gains and a high household debt burden will limit consumption growth somewhat. We expect a pick-up in non-mining investment over the coming quarters, reflecting higher residential construction activity and public infrastructure outlays.

"We estimate that the Australian economy will continue to expand in line with its potential growth rate of around 2-1/2 percent y/y in 2017–18," Scotiabank commented in its latest research report.