Australia in 2018 : Surfs up! Cash rate too! Riding the global growth wave

Australia is set to ride the global growth wave.

We forecast above-trend (and above-consensus) growth of 3.2% in 2018.

An improving business sector and tightening labour market should lift wages growth, supporting household spending.

We expect the RBA to start lifting its cash rate around mid- 2018 and see the AUD rising to US84 cents in 2018.

Hangin’ ten on a global wave

A wave of global growth is gaining momentum and should support Australia’s economy in a number of ways. First, commodity prices have lifted, boosting national incomes, corporate profitability, and tax revenues. Second, rising global demand is supporting demand for exports of energy commodities, high-quality food products, and tourism and education. Finally, the lift in global optimism is supporting a pick-up in business conditions, driving rising local investment and hiring.

We expect GDP growth to pick up from 2.4% in 2017 to 3.2% in 2018 (consensus is 2.8%). This outlook is underpinned by HSBC’s above-consensus China growth forecast (6.7% versus 6.4%) and our view that the lift in local business conditions will continue to support hiring, which, as it tightens the labour market, should drive a pick-up in wage growth. The lift in wage and jobs growth is expected to support stronger growth in household incomes, consumer spending, and tax revenues.

Although Australia’s housing construction boom is coming to its end, we expect the drag to be more than offset by a stabilisation in mining investment (after significant declines in previous years), a pick-up in investment in urban infrastructure, and by rising business investment. Overall, investment is set to rise solidly in 2018.

We see house price growth slowing in 2018, after a five-year boom. However, we do not expect significant price falls, as the market is supported by strong population growth, some expected loosening of prudential settings, and mortgage rates that are still historically low (despite our view that they will edge higher in 2018).

The clearest signs of improvement in the economy are in the labour market. Jobs growth has been strong and the timely indicators suggest continued solid momentum. We expect the unemployment rate to fall to a ‘full employment’ level in 2018, supporting a pick-up in wages growth. We also expect growth in 2018 to be the most broad-based across regions and industries in more than a decade, which should see increased demand for skills across a wide range of areas, supporting wages growth.

We expect the RBA to lift its cash rate in 2018, with a first hike pencilled in for Q2. With hikes expected, we see the AUD rising to US84 cents in 2018. 

PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC.