It appears as though the Australian economy expanded by between 2.5 and 2.75 per cent throughout 2017, writes Janus Henderson’s Frank Uhlenbruch – but what’s ahead for 2018?
While weather events created some volatility in the data, it appears as though the Australian economy is poised to expand by around 2.50 per cent to 2.75 per cent over 2017.
Monetary policy settings remained accommodative with the Reserve Bank of Australia (RBA) leaving the cash rate unchanged at 1.50 per cent.
Central banks’ concerns about medium-term financial stability were somewhat allayed by macro-prudential measures designed to tighten lending standards and limit growth in riskier types of lending.
The main positive surprise on the macro side was the strong rebound in the labour market after a lacklustre period over 2016 and early 2017.
Over the 12 months to September 2017, employment was up 3.1 per cent, with full time jobs growth accounting for most of the gain.
The rebound in the labour market helped close the gap between persistently elevated levels of business conditions and subdued levels of consumer confidence.
Given the strength in jobs growth, some fall in the unemployment rate could have been expected over the year.
Instead, the unemployment rate has largely tracked sideways as labour market strength enticed workers back into the labour force, resulting in a lift in the participation rate.
Going into the end of 2017, historically low rates of wages growth and elevated levels of underemployment suggest that the labour market still has some slack in it. So what’s in store for 2018?
Trend to above trend growth
Against the backdrop of solid major trading partner growth and with public infrastructure work yet to be done at around 6 per cent of nominal GDP, the economy is reasonably well-placed to manage the end of the most recent housing boom.
Consumption is expected to grow at a moderate pace and net exports are set to benefit from further expansions in LNG export capacity.
Business investment is poised to become a source of growth as the drag from falls in mining investments finally ends. Overall, we see economic growth lifting to around 3 per cent.
Gradual lift in inflation
We look for the underlying inflation rate to gradually lift to 2 per cent by the end of 2018. Upward pressure comes from the direct and indirect flow-on effects of higher utilities prices.
Some further tightening in labour conditions and the flow-on effects from the 3.3 per cent lift in the minimum wage in mid-2017 should exert upward pressure on inflation in the non-tradeable sector.
Working in the opposite direction is limited rent inflation given recent increases in dwelling supply and heightened completion in a range of sectors from new and prospective new entrants.
RBA tightening on the horizon
While some offshore central banks have begun to remove high levels of policy accommodation, the pace of tightening is expected to be very gradual given low wages and inflation outcomes.
Given that many offshore economies had to ease monetary conditions by much more than Australia, the RBA has suggested that initial rises in offshore rates have no automatic implication for domestic settings.
While the RBA appears to be in a patient mind-set, its expectation is that the next move in the cash rate will be up.
We suspect that as we head towards the end of 2018, the growth and inflation outlook will allow the RBA to commence winding back the level of monetary accommodation towards a more neutral stance.
Frank Uhlenbruch is an investment strategist in the Australian fixed interest team at Janus Henderson Investors.