Australian economy to perform strongly in 2016 despite challenging environment

The Australian economy is expected to perform strongly in 2016 in a challenging environment. Down side risks for the economy have reduced based on the better-than-expected December 2015 annual GDP growth and the recent bounce in commodity prices. However, global fragilities are key threat to the economy. Global economy growth in 2016 is likely to rebound slightly but continue to be sluggish at 3.4%, as compared with 2015's 3%. Moreover, there are domestic uncertainties. With a Federal Election in 2016 businesses might delay investment and hiring decisions.

"Australian real GDP growth is forecast to reach 2.8% for the year to December 2016, a touch below the 3.0% outcome for December 2015, before strengthening to 3.0% in December 2017", says Westpac.

Growth of 2.8% will be consistent with estimates of trend growth. That said, conditions throughout the economy will continue to be uneven as offsetting forces continue to affect, while the shift from mining investment led growth to strength throughout the non-mining sectors is still underway.

Meanwhile, consumer spending, which had performed strongly in H2 2015, is unlikely to be sustained in 2016. The strong performance seen in H2 2015 was due to the 3% jobs growth, which has already given way to employment stalling at the beginning of 2016. In this year, consumer spending is projected to grow 2.8% and 3.2% in 2017.

Australia's expected strong performance in 2016 is in spite of key negatives. The income backdrop is not favorable, while mining investment downturn is expected to be at its peak in 2015/2016. The terms of trade is expected to decline moderately this year by 2% before stabilising in 2017.