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Commenwealth Bank Quarterly Update
Commonwealth Bank Chief Economist, Michael Blythe reported that despite a recent slowing of the economy, the overall picture is one of optimism as many of the driving factors for growth are ‘locked and loaded’ with a commodity cycle set to defy historical trend as the demand for commodities becomes a permanent feature of the global economy.
The headline themes and issues of significance covered are summarised below for the exclusive benefit of Australian Business members.
(Note this summary is prepared by Australian Business and not the Commonwealth Bank of Australia).
Australia’s healthy terms of trade (close to 140 year highs) are underpinned by the consistent demand from China for Australian commodities. Robust incomes and capital spend have contributed to an unusual divergence between production and income leaving the average Australian reaping a $6,000 increase in spending power each year.
China’s policy response to inflationary pressures is a threat to Chinese domestic economic activity and demand for commodities. But Chinese policy makers look to have done enough and the outlook for commodity demand remains encouraging.
The changing face of the East Asian economy is that of an emerging middle class where the consumer becomes the key driver of growth.
Australia’s record infrastructure development and rate of full employment is resulting in rising inflation pressures and will require higher interest rates at some point. Interest rates are set to rise by a full 1% to manage these inflation risks. Consumer expenditure is mixed with retail caution slowing growth but increased activity in non-retail areas such as car purchases.
Attributed to gender specific perceptions of the strength of the economy with (less optimistic) women tending to dominate spending in retail areas and (more optimistic) men in non-retail areas.
Concerns about Australian housing price trends have been around since 2001. But, the house price to income ratio in Australia is about 4, which is the middle of the range on a global comparison.
BUDGETARY IMPLICATIONS & PROJECTED GROWTH ·
The Australian economic and social landscape is set for dramatic growth with potential GDP growth rates set to step up from ≈3% to ≈3¾% and the economy $3.2trn in size by mid-century (2.5 x current size). This requires significant business borrowing and implies a need for return to Budget surplus and increased household savings.
Australian Government policies of addressing growth centered on the 3 P’s: population, participation and productivity.
Recent budgetary measures resulted in increased skilled migrant intake to service mining industry and infrastructure boom; efforts to improve participation rates through a move off welfare and into work; infrastructure spending in key areas of education and skills development.
Longer term growth is also fuelled by the emerging East Asian middle class through Australian industry response in agriculture, commodities, manufacturing and education and tourism sectors. The increased strength of the Australian dollar looks to continue.
The following are paraphrased responses from 2 questions posed from the audience.
The service of Australian growth is linked to the savings of the global economies and Australia is in a very good position to enable FDI. The AAA rated economy; exposure and knowledge of the Asian growth markets; and the broad mix of commodities on offer are all key factors in attracting inward investment.
As China becomes increasingly concerned about the security of supply with regard to commodities, an increase in direct investments in the resources economy is likely.
The increased strength of the Australian dollar will impact on manufacturing and tourism industries heavily in the short term. Proposed government response is to reduce company tax rate providing immediate relief to business. However, the long term rise of the emerging middle class in Asia will improve the activity of these markets
Contributed by Australian Business UK