According to BIS Shrapnel’s Long Term Forecast 2014-2029 report, which was released today [Wednesday], the country’s economy is set for its weakest four-year period since the early 1990s-recession.
While GDP will average 3% annually, thanks to strong mining production and exports, soft employment growth [of just 668,000 jobs over the next four years] will act to stymie domestic demand.
BIS Shrapnel senior economist Richard Robinson said there will be a slow, difficult transition from an economy driven by a huge resources construction boom back to a balanced economy.
“Also, the high dollar undermined the competitiveness of domestic trade-exposed industry, inducing structural change as we tilted the economy towards servicing high levels of mining investment.”
But the resources boom has now peaked, and its decline over the next four years will be a major negative to growth – although increased mining output and exports flowing from the boom will act to offset this slightly.
Robinson said the next set of growth drivers, which will take over from mining investment and rebalance the economy, will be slow to come through.
Australia’s stubbornly high dollar is acting as a major roadblock to a pickup in growth – because it needs to fall below US 80 cents to benefit the economy, he added.
“It will be tightening capacity, as the dollar gradually falls, and improved confidence that drives a recovery in non-mining business investment. But that, we believe, is at least 12 to 18 months away.”
In the interim, it is housing investment and net exports which will act as the key drivers of real GDP growth.
Robinson said the long-awaited recovery in dwelling investment is now entrenched, after a delay due to weak housing market sentiment and excessive caution by investors.
“The expectation of low interest rates for an extended period, combined with a substantial deficiency of residential stock, is driving a solid increase in dwellings building.”
While this will help build momentum, the recovery will not be uniform with sizeable stock deficiencies set to drive certain markets – particularly in parts of Queensland and New South Wales.
However, the next four years will be tough largely due to a cumulative 40% decline in resources investment, Robinson said.
“Put simply, there will not be enough non-mining investment to replace the loss of mining investment over the next four years… Loss of jobs associated with mining investment will keep employment growth subdued.”
On a brighter note, the report forecasts interest rates to remain at current low levels over 2014/15, with only modest rate rises in the next cycle.
Further, it predicts strong growth will resume later this decade, with GDP and domestic demand growth lifting to around 3.5% in 2018/19 and strengthening through to early next decade.
The expected lower dollar will be a key element of that, with another round of mining projects, further public investment and a renewed upturn in housing and non-dwelling building also contributing.