Grow Magazine

2018: a year of growth and challenges

Economists predict the Australian economy will continue to prosper this year, writes Heather Jacobs.

 

The outlook for the local economy continues to be optimistic for 2018, according to ANZ senior economist Joanne Masters, who predicts 3 per cent growth, but points out that rising interest rates will add to the already challenging mix of low wage growth and record debt for households.

Key points

  • Interest rates increases will add to an already challenging environment for  household spending
  • House price growth will be  much slower in 2018
  • Unemployment will continue to drop, but not as fast
  • China's debt-laden economy is a notable risk for Australia.

Houses prices and incomes to increase for Australians

In this video (filmed December 2017), Masters says interest rates are expected to rise by 0.5 per cent over 2018.

While rates are still historically low, the half a per cent increase across the year is expected to have an impact on the housing market, which started slowing in late-2017.

Housing price growth is expected to halve from a high of 11 per cent nationally in early 2017 to about 2.5 per cent by the end of 2018.

“It is going to feel weak, but housing price growth is still positive and interest rates, while higher, will be relatively modest by historical standards,” says Masters.

“We’ve had quite a strong housing cycle, not just in house prices, but residential construction as well, and that’s set to slow somewhat,” says Masters. “[Now, Australia’s economy] is being picked up by infrastructure spending and non-mining business investment.”

She says those newer forces driving our economic growth are investment led and won’t be apparent to the average person, who may not feel that ‘things are accelerating’.

What should be more apparent is that jobs growth has been very strong by historical standards (400,000 jobs in the 12 months to December 2017). Most of them were full-time, representing the highest level of growth since early 2008. However, that rate of increase is expected to drop back to about 15,000 to 20,000 new jobs each month this year, which will still be enough to see unemployment gradually decline.

Masters predicts a drop in unemployment from 5.5 per cent to 5.2 per cent by the end of 2018. This will help drive incomes up about 3 per cent – a figure broadly in line with the forecasts for consumption growth.

Australia’s economic risks in 2018

While China continues to be a very positive story for Australia in the medium-term – being a powerful source of demand for our goods and services – this makes it one of our biggest risks. A sharp slowdown in growth in China means it will demand less of our exports, not just directly, but through China’s links with the broader global economy.

“Australia is a small outward-looking economy, so the amount of leverage or debt in China is a concern, perhaps one of the biggest concerns for the global economy,” says Masters. “That needs to unwind at some point, something that’s likely to require a period of somewhat slower growth in China.”

She says we need a ‘soft landing’ for China’s economy, which will give time for Australia to adjust. But a ‘hard landing’ could send shockwaves through our economy.

Domestically, our biggest economic risk comes from households spending less as consumers face very high household debt and low wage growth.

“The consumer is the biggest part of our economy, representing about 60 per cent of our global domestic product, so if we saw consumption slowdown sharply, it would be very hard for the economy to attain those 3 per cent growth rates.”