New Market Research Report: Australia Business Forecast Report Q3 2013

Recent economic data releases suggest that the slowdown in economic activity in Australia is becoming increasingly evident. We maintain our outlook for real GDP growth to come in at a sombre pace of 2.1% in 2013, as the mining industry pares back its investments weighed down by high costs and the weakening Chinese economy dims the industry's profit outlook.

We believe that the housing market remains precarious, as the affordability of homes continues to edge to a new low. Given our poor outlook for the Australian job market in 2013, in which we forecast unemployment to reach 6.0% by the end of the year, we believe that demand for housing will decline. The overextended household balance sheets further augur the growth in housing-related credit growth. In our opinion, the Australian banking sector is the sector most leveraged on the housing market and we expect that declines in house prices will adversely impact the industry.

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The ruling Australian Labor Party (ALP) barely clings on to its parliamentary majority and the party's austerity stance has unravelled, slowly but surely. We believe that the party will try to introduce more populist policies in an effort to consolidate support for the ALP, but expect that the increasingly hostile environment against debt to restrain the government's expenditures. Federal elections are set to be held on September 14.

We forecast the Reserve Bank of Australia (RBA) to hand out another 25 basis points worth of cuts, but have highlighted the growing risk that the central bank could cut more as we expect economic slowdown to be far deeper than the RBA's current estimates. We believe that central bank will continue to attempt to stave off a decline in credit growth by easy monetary conditions further.

Major Forecast Changes

We have revised our forecast for the fiscal accounts to remain in deficit until fiscal year 2020/21 (July-June), delayed from our previous forecast of FY2017/18 due to the substantial revision in estimated revenues that were due from the carbon and mineral resource rent taxes. Contrasting the policies provided by the two major parties, ALP and Liberal-National coalition, we believe that a coalition government is likely to incur less debt, although both will be unable to quickly return the fiscal accounts to surplus. Given that we believe that the Liberal-National coalition is likely to win sufficient seats to form a government in the upcoming elections, we expect the deficit to start narrowing in FY2014/15, before returning to surplus in FY2020/21.

Key Risks To Outlook

China could implement aggressive stimulus measures to support its weakening economy, which would in turn support Australian exports and boost. While we maintain that any Chinese stimulus is likely to be smaller than the previous boost in 2008/2009, this remains a key risk and is something we will be watching closely.

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