Our Economic Outlook October 2013

Economics - Competent - 700 Words - Reading Time 5 minutes

Australia's economy is in transition. Mining investment has been powering the economy but is now in decline. For growth to continue at the same rate, there will need to be a pick up in the domestic economy. We are in a good position to be able to make that transition but the uncertainty about how this will play out has dampened business and consumer confidence and held back domestic demand. In this article we will look at the factors influencing our economy and what the outlook is. 

The Federal Election

Australian Elections do not usually have a major economic impact but this election took on more importance because of the difficult period with a minority government leading to an uncertain environment.

The policies of the coalition will to lead to smaller government and less regulation. This business friendly approach should improve productivity and economic growth. However, the effectiveness will depend on getting legislation past the Senate. 

The US Economy

While the US government shutdown and debt ceiling issues have been resolved for the moment, the US economy will continue to have an impact on the Global Economy. The International Monetary Fund (IMF) has reduced its forecast for US economic growth due to the impact of sharp spending cuts instituted by the government earlier this year. These were aimed at trimming the federal deficit.

China and the Emerging Market Economies

Global growth in recent years has been boosted by China and the emerging economies of Brazil, Russia, India, and South Africa. However, these economies are currently experiencing a slowdown and this is going to have an impact on our economy - particularly in the mining sector.

Mining Slowdown

Over the last decade, our economy has benefited from a large increase in investment in the mining sector that has gone from under 2 per cent of GDP to 8 percent of GDP. This has been fueled by global demand and a steep rise in commodity prices.

Those commodity prices have now come off from their high and according to Reserve Bank of Australia (RBA) governor Glenn Stevens on July 30 2013: "It is now well understood that the 'mining boom' is shifting gear, and that we are entering a new phase."

Shipments of iron ore are still rising by about 15per cent per year and GDP will get a lift from this increased activity. But the bigger impact will come from the slowdown in infrastructure investment. According to the Bureau of Resources and Energy Economics (BREE), the value of new resources projects at the committed stage declined by $799 million from October 2012 to April 2013 and further falls are expected. With the infrastructure already in place, the emphasis is now on shipping. The result will be fewer jobs in the mining sector and this will have a flow on effect.

Some positives

There are a number of factors that will help us make the transition from our heavy reliance on mining investment to drive the economy.

The Australian Dollar come down in value by around 15% from it's peak. This increases the price of imports and decreases the price of exports making Australian companies more competitive

In addition, the RBA has cut interest rates and created an environment to stimulate local levels of demand. Household savings have steadily increased over the last decade and are currently averaging around 10% of household disposable income. All this means that Australian Households are in a strong position to spend as consumer confidence grows.

In Summary

With a number of world economic factors impacting us and some concern about the slowdown in the mining sector we are likely to see moderate growth in the economy through 2014. The IMF outlook for Australia's growth rate is 3% this year and 3.3% next year. Our Reserve Bank has predicted growth of 2.25% this year. However, there seems to be an increase in confidence in the economy and some good signs that Australia is well placed to cope with the transition from our reliance on the mining boom.

Please Note: This document has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives, financial situation or needs. Before making any investment decisions, you will need to consider if the information in this document is suitable for you. You may want to ask a financial adviser to help you.