Low commodity prices, weak Chinese demand to continue to impact Australia’s economic performance

In the fourth quarter of 2015, the Australian economy expanded 0.6% q/q and 3% y/y. For the entire 2015, the economy expanded 2.5%. Weaker demand from China and low commodity prices are expected to negatively impact the country’s economic performance, according to Scotiabank.

However, domestic side of the economy will continue to be strong, noted Scotiabank. Loose monetary policy, low fuel prices, gradual recovery in labor market conditions and wealth effect of high house prices are expected to underpin consumer spending.

Meanwhile, growth in private investment is expected to continue to be negative since the boom of mining sector investment has ended, added Scotiabank. Public infrastructure expenditures are likely to give moderate support to the Australian economy. External sector challenges are partly countered by elevated export volumes.

“Australia’s annual real GDP growth will likely average 2.7% in 2016-17”, said Scotiabank.

Meanwhile, monetary conditions are expected to be accommodative in the following quarters with the interest rate at the record low level of 2%. In May 2015, the RBA cut policy rate by 25bps and has kept the policy on hold since then. According to monetary authorities, the inflation outlook gives room for easing the policy further if the economy requires more support. Australia’s consumer price inflation accelerated a bit to 1.7% in Q4 2015; however, it continues to be lower than the central bank’s target rate of 2%-3%.

“We estimate that headline inflation will likely accelerate slightly over the coming quarters — closing the year at 2.4% y/y — and will remain comfortably within the RBA’s target in 2017”, noted Scotiabank.