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Promising year ahead for Australian economy

Australia's 2018 economic outlook

Australia’s economic prospects for the year ahead look healthy, although risks remain.

Last year the Australian economy enjoyed a record 26th straight year of growth, overtaking the Netherlands as the country with the longest period of expansion. That trend is set to flow into 2018, with an improving global outlook and favourable domestic conditions all but guaranteeing this period of growth will continue.   

A synchronised upturn is pushing global growth above trend for the first time since 2011, with trade, capex and employment all on the rise. An expected rise in inflation will probably take pressure off the extreme monetary policy settings currently in force worldwide, stimulating economic growth yet further.

Although commodity prices are expected to fall in the long term, they may surprise on the high side in 2018 in tandem with growing demand from China. While the unwinding of the commodity boom and the resulting income recession posed a strong downside risk to Australia’s economy from 2011-2017, a return to pre-2011 GDP growth has boosted company profits and government revenues, suggesting tax cuts may be on the table.

Other factors supporting the growth story include Australia’s rising resources exports, particularly LNG, a rise in infrastructure spending, improved investor sentiment and rising incomes in Asia. The risks posed to the economy by the slowdown in residential construction may be mitigated by a rise in the population’s growth rate, which will stimulate demand.  

Although non-mining capital expenditure appears to be growing, concerns exist that businesses are reluctant to spend, worried by rising electricity and gas prices. Some respondents to the CommBank Purchasing Managers’ Index say capacity constraints are holding back output, with backlogs and delivery times getting longer. A continued reluctance by businesses to lift capex would limit Australia’s capacity to take part in the global upturn and would place upward pressure on labour costs and prices.

Weak income growth and tighter household budgets pose another risk to Australia’s economic health, but with the correct economic policies in place we could see jobs growth continue and wages rise.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.