This article follows the view of the Westpac chief economist, Bill Evans, as he expresses his discouraging outlook for the Australian economy. A variety of factors are affecting the rate of growth of the economy and it is said that these factors are likely to affect Australia’s growth until late 2018.
Low Commodity Prices
Australia is experiencing a drop in commodity prices (raw materials or primary agricultural products) which is therefore leading to a lower terms of trade. Commodities are Australia’s largest exports so a drop in its prices means that the relative price of exports to imports is low. This affects the net exports aspect of aggregate demand and will create a downturn in the economic growth cycle. Evans also outlines that he believes the terms of trade will fall by 16% in 2018 as a result of the drop in commodity prices.
Business and Consumer Confidence
Businesses and households are spending less in the economy due their “muted” confidence towards the economy. Less consumption is contributing to the decline in growth as consumption “accounts for around 60% of the entire economy”.
Low levels of consumer confidence seem to stem from low wage growth as many households may find it a struggle to uphold their normal living standards as they will have less ability to purchase their goods and services. Low wage growth is also causing an increase in household debts. The recent budget also added to the load of negatives by indicating “disappointing” prospects for employment and investment.
Evans states that the housing market’s price inflation will “disappear over the next year”.
This outlook comes from the efforts taken by regulators and the government to slow price growth after years of rather extreme price inflation especially in capital cities such as Sydney and Melbourne.