Australia’s economic outlook remains strong relative to OECD peers

14 Dec 2017

Tags

  • Edmund Tang
  • Australian Economy
  • GDP
  • OECD

The Australian economy continues to grow at a solid pace, according to the latest OECD Economic forecast summary (November 2017). The agency is forecasting Australia’s real GDP growth rate at around 2.8 per cent in the next two years, largely driven by business investment outside the housing and mining sectors and also boosted by robust export growth. Australia’s projected growth rate is much stronger than the average forecast growth rate (2.3 per cent) of 34 OECD economies (see chart below).

Australia Versus OECD Average - Real GDP % Growth

However, the OECD in its summary also warned that some economic uncertainties and risks remain in Australia (see table below).

  • The Australian labour market is expected to improve and the unemployment rate to gradually ease to 5.3 per cent in 2019. However, the OECD indicated that underemployment has edged higher and wage growth and inflation remain soft. These factors, together higher household indebtedness and signs of a cooling housing market, will likely keep consumer sentiment relatively soft. Hence, private consumption growth will remain weak at an average rate of 2.4 per cent a year in the following two years.
  • In addition, the agency stressed that developments in commodity markets, particularly those linked to China – Australia’s larger trading partner - remain a source of uncertainty and risk.
  • OECD officials also urged the government to stick to its plan of gradually improving the budget position. However, they added that an easing in fiscal policy would be justified if the economy weakens suddenly.
  • The OECD also noted that the prolonged period of low interest rates has fuelled high house prices in our major capital cities. At the same time, household debt has surged due to substantial mortgage borrowings. According to the report, high house prices and rising household debt, amid subdued income growth, have also raised macroeconomic and financial risks, calling for continued use of macro-prudential tools. The OECD further commented that major corrections in house prices could reduce household wealth and consumption, and hurt the construction sector, leading to job losses.

Australia: Demand, Output and Prices

Comparing the OECD’s GDP forecast with the latest IMF’s projected rate from World Economic Outlook and the one from the RBA’s Statement on Monetary Policy – November 2017 in the following two years, the OECD’s average rate is marginally lower than the IMF (2.9 per cent on average) and RBA (3.1 per cent). More importantly, however, they are all expecting stronger Australian growth rates in 2018 and 2019 (see chart below).

Australia