Market Report, "Australia Country Risk Report Q2 2016", published

From: Fast Market Research, Inc.
Published: Wed Mar 02 2016

Overvalued Property Market The Largest Risk To Growth

Core Views

Real GDP growth is highly likely to slow over the coming years owing to a number of factors: slowing growth in the working age population; a high share of government spending relative to GDP; and a reversal in the country's terms of trade; and the growing risk of deflation. These impediments will result in real GDP growth averaging 2.3% over the next decade, down from 2.9% over the past decade.

The ruling Liberal-National coalition government's poor political fortunes are improving and gaining momentum, suggesting that it will emerge victorious in the upcoming federal elections, which must be held by January 2017. The coalition's rise in popularity came about after Malcolm Turnbull took over as Australia's Prime Minister on September 15 2015, when he ousted Tony Abbott in a snap Liberal party leadership vote. Turnbull is clearly enjoying a 'bounce', meaning that polls could still narrow, but for now the coalition has the advantage.

Full Report Details at

We remain bearish on the Australian dollar despite the large fall we have already seen in the currency. While valuations are no longer a headwind to the currency, the trend remains very bearish. Weak economic growth owing to falling investment and correction in the property market amid elevated indebtedness does not bode well for the AUD.

Australia's fiscal accounts are unlikely to return to a surplus any time soon, given downside risks to revenue collection and a lack of expenditure cutbacks. Total revenue collection will remain poor as the economy continues to weaken, which will weigh heavily on tax receipts. Meanwhile, objections to spending cuts from the public, opposition and crossbench senators as well as other state governments indicate that the Australian government will struggle to keep its expenses and borrowing on a sustainable trajectory. While there is currently no danger of a fiscal crisis, our core view is that this growing burden of the government will undermine the productivity of the private sector and take its toll on economic growth over the medium term.

We expect the Reserve Bank of Australia (RBA) to cut its cash rate by 50bps to 1.50% in 2016 as overall economic growth deteriorates as the unwinding investment boom is compounded by a weakening housing market amid a subdued inflationary environment.

Major Forecast Changes

We maintained our major forecasts as highlighted in our previous Q116 Country Risk Report and we highlight the key risks to our outlook below.

Key Risks

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