The Australian economy continues to work its way through a transition away from mining-driven growth towards stronger outcomes from residential construction and the services areas of tourism, accommodation, health and education. The varying outcomes across the business sectors and the employment market reflect these shifts.
In our view, the domestic economy has strengthened in the past six months, with overall real growth finishing the year at 3 per cent, in line with the longer term average. A significant proportion of that growth came from higher goods and services export volumes. But there were also solid contributions from stronger household spending trends, particularly in the services areas like health, education and tourism.
The CommBank Accounting Market Pulse indicates that accounting firms are slightly less optimistic about future business conditions in the current survey than the previous one. They are also less positive on the 12-month and two-year outlooks for their firms.
The national employment market has expanded reasonably firmly over the past year and the unemployment rate is near 5.8 per cent, which is well below the rates of early 2015. Jobs growth has mainly been in the larger states of New South Wales, Victoria and Queensland over the past year. The combination of very low mortgage rates and a residential construction boom is beneficial for the jobs market across a number of sectors in those states. The lower Australian dollar is lifting the currency exposed sectors of the economy. Low interest rates look set to stay in place over the coming year. Inflation remains low and there is little sign of change in the trend towards quite weak national wages growth.
In our view, the background conditions for the economy are likely to remain quite mixed through the coming year. The lack of a consistent theme of uniform improvement in overall growth tends to promote a greater degree of caution than otherwise would be the case. Even though interest rates remain low by historical standards, there is still considerable caution on the part of businesses and households in terms of investment and spending decisions.
The higher levels of business caution are likely to mean the emphasis on various measures to control costs, and even reduce them, will remain paramount. Relatively low national wages growth reflects the trend to both limit staff cost growth and lift productivity. The other challenges in the firms surveyed include collecting invoices, negotiating prices charged to clients and recruiting and holding quality staff. These issues are not just a local phenomenon. They are regularly covered in global business magazines. When growth in the market slows, there needs to be a much more concerted control over expenses to maintain a profitable business.
Overseas influences on the local economy will remain important over the rest of the year. Australia’s major trading partner, China, is also progressing through a transition towards more consumer spending driven growth. The change will present Australian businesses with new opportunities because part of it involves much higher numbers of Chinese tourists coming to Australia. They will also be interested in investment possibilities in parts of the local economy, like tourism, accommodation and all forms of property. So while there be some doubts about the future of Australia’s mineral exports to Australia, there are significant growth opportunities for other sectors if China’s transition succeeds.
The Australian dollar can be seen as barometer of how China’s economy is performing. The Australian dollar’s recent shift to higher levels reflects not only a weak US dollar, but also a clear pick-up in global commodity prices like iron ore and oil. That is principally because the news on China’s economic outlook has become more optimistic but it also reflects reduced oversupply concerns. For exporters, the higher Australian dollar is not such good news. But we do not see it returning to the very high levels of a few years ago. We believe the dining and tourism booms can proceed as China’s demand grows and the Australian dollar stays near current levels.
To read the full report, visit Commonwealth Bank’s website here: https://www.commbank.com.au/corporate/industries/professional-services/accounting/marketpulse.html
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