Australia avoids a recession

12 May 2017

Australia avoided a recession at the end of last year by recording Gross Domestic Product (GDP) growth of 1.1 per cent in the December quarter after recording a very weak -0.5 per cent in the September quarter.

The main reasons for the rebound were increased exports, helped by stronger commodity prices, household consumption and public investment. Despite this, GDP growth is likely to remain subdued in 2017 because there are a number of risks that could negatively affect the economy including a softening in commodity prices, a decrease in debt leveraging in China and potential adverse impacts from world political events.

It’s not all smooth sailing for the RBA

The Reserve Bank of Australia (RBA) believes that the rise in commodity prices over the past year has significantly helped increase Australia’s value of exports relative to the value of its imports. This could have a bigger flow through to the economy than first thought.

On the flipside, the RBA appears concerned about the spare capacity in the labour market which is hindering wage growth.

The housing market is also a concern because investor borrowing and household debt continues to rise. In particular, Sydney and Melbourne continue to exhibit strong house price growth. The RBA noted that there has been a build-up of risks associated with the housing market and is likely to be reluctant to cut the cash rate to prevent fuelling the house market.

Trump hits first major stumbling block

In March, Trump hit a major stumbling block in his attempt to repeal and replace the Affordable Care Act (Obamacare). Trump was forced to withdraw his American Health Care Act due to the lack of support in Congress, even though the Republicans hold a majority in both houses, and even though Republicans heavily opposed the Obamacare bill passed in 2009. This setback has raised some doubts about the Trump administration’s ability to push through legislation. As a result, Trump has set health care aside to focus on tax and regulatory reform. This will also likely prove difficult given there hasn’t been major tax reform since 1986 and many Democrats are unwilling to work with Trump. He is also having trouble drawing support from within his own party. Although this has raised doubts about the ability of the Trump administration to push through legislation, it appears that markets are still being too complacent.

Europe is powering along despite geopolitical events

Despite the political noise ringing out of Britain, the Netherlands and France over the quarter, many European share markets hit, or came close to hitting historic highs.

For instance, following some parliamentary ping pong, the Brexit bill was approved. This gives the British Prime Minister, Theresa May, the power to officially begin the process of leaving the European Union (EU). This was a non-event for financial markets with many share markets continuing to trade at or around historical highs.

In response, the President of the European Council, Donald Tusk, announced that he has a strong mandate to protect the interests of the 27 member states, EU citizens and businesses. This is a reminder that uncertainty persists in the region and the post-exit relationship will have an important economic impact.

Meanwhile, in the Netherlands, Geert Wilders, the anti-Islam and anti-EU candidate, lost to incumbent Prime Minister Mark Rutte — providing right-wing populism with a setback.

The United Kingdom will also now hold a general election in June. The British Prime Minister, Theresa May, said that the election had been called because “Division in Westminster will risk our ability to make a success of Brexit, and it will cause damaging uncertainty and instability to the country”.

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