Australian economy to remain fastest growing advanced economy through 2018, says Scotiabank

Australia’s economy is likely to stay the most rapidly expanding major advanced economy through 2018, noted Scotiabank in a research report. However, in spite of its strong performance, the Australian economy is expected to continue to be hit by the low commodity prices and subdued Chinese import demand. Australia ships one third of its exports to China. Furthermore, the Australian economy is undergoing a structural change after the end of a recent resource investment boom, and is looking for alternative sources of growth from non-mining related domestic demand, said Scotiabank.

Increased export volumes, which show mining project completions have propped up the real GDP growth during this transition, assisting the Australian economy to register above-trend output gains. Australia is adjusting reasonably well to the new economic reality, but a continued downturn in mining investment and a lower contribution from net exports are expected to result in slightly slower economic momentum in coming years.

“We expect the nation’s real GDP growth to decelerate to still-sound 2½ percent y/y by 2018 from the current pace of around 3 percent”, added Scotiabank.

During the structural transition of the Australian economy, domestic demand would be continued to be supported by accommodative monetary conditions.

Meanwhile, the Reserve Bank of Australia’s new governor Philip Lowe took office in September 2016. Under his leadership, the central bank’s broad policy is expected to continue. The central bank has kept the key interest rate on hold at 1.5 percent since August. The key rate might be cut one more time in the first half of next year if employment and wage developments in the near term indicate toward subdued consumer spending outlook.

Price pressures are likely to stay low in the country. The headline inflation rate accelerated slightly to 1.3 percent year-on-year in the September quarter of 2016, but continued to remain quite below the central bank’s target rate of 2 percent to 3 percent year-on-year.

“Given muted labour cost pressures, consumer price inflation will likely rise only slightly in the near term, remaining below the 2 percent lower boundary through 2017”, stated Scotiabank.