Economic Outlook 2016
March 3rd 2016 | , Urban Property Australia
The pickup in global activity is projected to be more gradual than expected, especially in emerging and developing economies.
Global Economic Outlook
In 2015, global economic activity remained subdued with growth projected to be 3.1%, down from 3.4% in 2014. Growth in emerging and developing economies — while still accounting for over 70% of global growth — declined for the fifth consecutive year, while a modest recovery continued in advanced economies.
Three key transitions continue to influence the global outlook: the gradual slowdown and rebalancing of economic activity in China away from investment and manufacturing toward consumption and services; lower prices for energy and other commodities; and thirdly, a gradual tightening in monetary policy in the United States in the context of a resilient U.S. recovery as several other major advanced economy central banks continue to ease monetary policy.
According to the International Monetary Fund, global growth is projected at 3.4% in 2016 and 3.6% 2017.
Overall growth in China is evolving broadly as envisaged, but with a faster-than-expected slowdown in imports and exports, in part reflecting weaker investment and manufacturing activity. Growth in China is expected to slow to 6.3% in 2016, down from 6.9% in 2015, reflecting weaker investment growth as the economy continues to rebalance with growth of 6.0% forecast in 2017.
India and the rest of emerging Asia are generally projected to continue growing at a robust pace, although some countries may face strong headwinds from China’s economic rebalancing and global manufacturing weakness.
Growth in emerging and developing economies is projected to increase from 4.0% in 2015 — the lowest since the 2008–09 financial crisis — to 4.3% and 4.7% in 2016 and 2017, respectively.
In contrast, growth in advanced economies is projected to rise by 0.2% in 2016 to 2.1%, and hold steady in 2017. Overall activity remains resilient in the United States, supported by easing financial conditions and strengthening housing and labor markets, but with dollar strength weighing on manufacturing activity and lower oil prices curtailing investment in mining structures and equipment.
Quarterly U.S. GDP growth slowed further in the December quarter to 0.2% qoq, equating to an annual growth rate to 1.8%, its lowest level in almost two years. Domestic final demand has held up better, growing by 2.5% over the year to the December quarter underpinned by solid household consumption and strong growth in residential investment.
While households are expected to benefit from falling oil prices and strong job gains, the US economy is forecast to continue to grow at a moderate pace, with growth projections of 2.6% in 2016 and 2017.
In the Euro area, where economic activity was depressed by the long-running Euro crisis, the outlook is looking stronger with the economic indicators suggesting sustained expansion. Growth is being led by stronger private consumption supported by lower oil prices and easing financial conditions, outweighing a weakening in net exports.
Australian Economic Outlook
Despite the falls of the equity and commodity markets in January 2016, the outlook for the Australian economy is essentially unchanged despite global risks with further recovery across the non-mining economy anticipated. The Australian dollar is expected to depreciate to USD66c by mid-2016 which should aid Australian services-based employment while lower petrol prices benefit most households and businesses. The rebalancing in the Australian economy has surpassed expectations to date, particularly in terms of the impact on the labour market. With the decline in resources investment approximately half way through; its impact on growth nationally has likely passed its worst.
Overall, the Australian economy is forecast to pick up to 2.7% in 2016, up from 2.3% in 2015 with further improvement forecast in 2017 with 3.0% expected before moving back to around 2.5% in 2018.
While the recent financial market turmoil has dampened business confidence, the NAB business index remains positive. In November and December 2015, employment data continued to point to a solid pace of job creation of around 30,000 each month, well above the 14,000 needed to keep the unemployment rate constant. As a result, the unemployment rate has fallen at a quicker rate than expected to 5.8% in December, driven primarily by the eastern states. However, forward-looking indicators look mixed overall with job advertisements showing a strong divergence between mining and non-mining states. Going forward, Australia’s unemployment rate is expected to fall to 5.6% by the end of 2016 and 5.5% by end of 2017.
Unless the recent financial market volatility translates into substantial negative real economic outcomes offshore, the February 2016 Statement on Monetary Policy suggests that the RBA is comfortably on hold with its mild easing bias intact given the improvement in the unemployment rate.
The low interest rate environment and the support to housing activity has been an important factor in the broadening of better economic activity geographically. However, the impetus to growth, from housing construction, housing turnover, and dwelling price growth is likely to wane this year. The Sydney housing market appears to have cooled, having recorded two consecutive months of price declines, while momentum in the Melbourne market has also slowed – but not as much as Sydney. Other capital cities experienced mixed outcomes in December.
Household spending growth looks to be solid across most states for the moment; however there are signs that the strength in household goods expenditure is losing steam, possibly reflecting the recent cooling of the housing market spearheaded by Sydney. That said, more recent data on retail spending continues to be relatively resilient, underpinned by improving trading conditions, while a lower AUD has encouraged tourism spending. Retail sales turnover growth for November was slightly below October but is expected to pick-up through 2016, driven by a reduction in households’ saving ratio, boosted by strong employment growth.
By State, public-backed infrastructure projects in New South Wales will help offset softer housing market activity. While housing and business investment has been strong in Victoria recently, conditions are forecast to ease in 2016. The Queensland economy is now showing more positive signs, but at the industry level it remains very mixed. With further declines in commodity prices, the impending falls in resources investment will prove challenging for the both the WA and NT economies.
Gross State Product Growth
Victorian State Economic Outlook
Economic activity in Victoria has gained momentum over the final half of 2015. Residential, commercial, and engineering construction activity have increased substantially over the past two years and have been critical to employment growth in the state. Public demand has been weak, but fiscal restraint appears to be easing. Public infrastructure spending looks set to provide some support to Victoria’s growth in coming years. Victoria’s population growth remains robust, with the state having recorded the highest population growth of all states at 1.7% over the year to June 2015, driven by net interstate migration.
Strong jobs growth has seen the unemployment rate decline to be in line with the national average after a period of exceeding it. Job gains have been largest in construction and healthcare.
These improving labour market conditions have subsequently supported income growth, which in turn has boosted household spending. Retail sales growth picked up in late 2015 with motor vehicle sales also strong. The outlook for household consumption is solid with strong population and employment growth coupled with low interest rates should continue to support spending growth.
The lower AUD will continue to support overall growth, particularly for tourism, agriculture, and manufacturing. The impetus to growth, however, is likely to slow as the rate of AUD depreciation slows. The impending closure of car manufacturing is expected to have a relatively small impact on overall activity, but will nonetheless impact some regions and sectors. Over 2016, the Victorian economy is forecast to grow by 1.4%, before increasing to 2.9% in 2017 and 2018 – its highest level in five years.
Economic Annual Growth