Seven reasons for optimism on the Australian economy

Key Points

  • The mostly gloomy debate around the Australian economy often gives the impression  we are in constant state of crisis.
  • But economic growth is pretty good, the economy has rebalanced without the  (“inevitable”) recession, the worst of the mining bust looks to be behind us, public   infrastructure spending is ramping up, consumer and business confidence are around  long term averages, share market profits have likely bottomed and Australia stacks up  well on social considerations.
  • These are all reasons to be reasonably optimistic about the Australian economy and  Australian assets. There are in fact several reasons for optimism on Australia.
  • First, economic growth is pretty good. With the economy expanding 3.1% over the year to the March quarter and looking similar for  the June quarter. This is in line with Australia’s long term average. It’s also way above most  other advanced countries. Latest annual GDP growth rates are 1.2% in the US, 1.6% in the   Eurozone and 0.6% in Japan. Of course I could add that the economy hasn’t had a recession in  over 25 years, but that one gets a bit overdone and owes a little bit to luck with statistics!
  • Second, the economy has rebalanced. The slump in mining investment and national income due to the collapse in our export prices  has been offset by a surge in housing construction, solid consumer spending, a pick-up in  services exports and a surge in resource export volumes.


As a result of all this, post mining boom weakness in WA & NT is being offset by strength in NSW and Victoria as the much talked about two speed economy has just reversed.

Source: ABS, AMP Capital



State of the states, annual % change to latest

The bottom line is that the recession many said was inevitable as a result of the mining bust hasn’t happened.

Source: ABS, CoreLogic, AMP Capital












Third, the worst of the slump in commodity prices and  mining investment looks to be behind us. After sharp falls from their highs around the turn of the decade  global prices for iron ore, metals and energy have stabilised as  greater balance has started to return to commodity markets  and the $US has stopped surging higher. While a new   commodity price boom is a long way away the stabilisation  should help our terms of trade and national income.

Furthermore, after falling for three years from a peak of 7% of  GDP, mining investment intentions indicate that mining  investment will have fallen back to around its long term norm  of around 1-2% of GDP by mid next year. Reflecting the slump  in mining investment, engineering construction has now fallen  back to near its long term trend indicating that the wind down  in the mining investment boom is almost complete and that it  will be less of a drag on growth next year. This is important  because the slump in mining investment has been knocking  0.5 to 1 percentage points of annual GDP growth over the last  three years.

Source: ABS, AMP Capital


Fourth, public infrastructure investment is ramping up  strongly. This is partly driven by former Federal Treasurer Joe Hockey’s  Asset Recycling Initiative that is seeing new state   infrastructure spending particularly in NSW and the ACT  financed from the privatisation of existing public assets. The  upshot of a fading growth drag from mining investment and  rising public capital spending is that it will offset the inevitable  slowing in housing construction that we will see next year.







Fifth, despite all the gloom consumer and business confidence  are actually around their long term averages.   Would be nice to be higher but it ain’t bad.

Source: National Australia Bank, Westpac/MI, AMP Capital







Sixth, share market profits have likely bottomed.   2015-16 was not great for listed company profits with   earnings per share down around 8% driven by a 47% slump in  resources profits and a 4% fall in bank profits. But it is  notable that 62% of companies have seen their profits rise on  a year ago and  the typical or median company has seen profit  growth of around 4%. 54% have seen their share price  outperform the market the day results were released which  suggests results haven’t been worse than expected. While  aggregate dividends fell 10% mainly due to a cut in resources  company dividends (which were never sustainable anyway),  86% of companies actually increased or maintained their  dividends indicating that the median company is doing okay.

Source: AMP Capital







Overall profits are on track to return to growth in 2016-17 as the slump in resources profits reverses (thanks to higher commodity prices, cost and supply controls) and non-resource stocks see growth. 2016-17 earnings growth is expected to be around 8%.

Source: UBS, AMP Capital








Finally, there are lots of social reasons to be optimistic  about Australia. For example, we are living longer, healthier  lives – in fact we  rank 4th in the world in terms of life expectancy (at 82.8  years). Our cities regularly rank amongst the world’s most  liveable cities – with Sydney and Melbourne  at 10 and 15  respectively according to one survey. Unlike many developed  countries our population is still growing solidly and we seem to do a better job at integrating immigrants than many countries. We are not wracked by the problems of a sharp rise  in inequality seen in the US and UK. Despite the usual post-Olympic whinging we outperformed all the other top 10 2016  Olympic medal winning countries with 1.2 medals per million  people (with the UK being the closest at 1 and the US at just 0.4).