Australia: Economy is back on track in 2017 - Westpac

The Australian economy is back on track in 2017, regaining momentum mid–year, following earlier weather disruptions, points out the research team at Westpac.

Key Quotes

“Recent partials have generally been positive and jobs growth was brisk over the first half of the year. Commodities have firmed as China has exceeded expectations in 2017 to date.”

“RBA Governor Lowe recently commented it is reasonable to assume “the next rate move will be up rather than down, but it will not be for some time”. We agree, although expect lower growth in 2018 and a higher unemployment rate. The widely-held view of RBA on hold for a significant period underwrites “carry-style” rates trades, and also suggests domestic rates markets will be overly influenced by offshore influences, creating tactical opportunities.”

“Persistent weak wages will continue to weigh on consumers and inflation remains benign. RBA expressed more confidence around labour markets, but household debt, housing markets and financial stability to remain key focus.”

“In that regards, we note that high-rise approvals have fallen sharply, although non-high-rise has been more mixed. Overall, the cycle appears to be turning down earlier than previously expected, with residential building set to be a significant drag on growth for several years.”

“For the AUD, this better data is providing near term support, but ultimately currency is set to weaken. Commodity outlook will weigh as China slows in 2018. Capital flows into Australia appear to have become less supportive for the A$ and yield differentials will narrow as RBA remains firmly on hold.”

“Politics may present a new risk, with a constitutional requirement on citizenship engulfing MPs on all sides. The High Court will ultimately decide, but this risks becoming an all-consuming political distraction which is not AUD positive.”