Australia’s growth at decade-low

31 May 2019

Australia’s gross domestic product (GDP) growth is expected to slow to a decade low of two per cent this year, its lowest since the 2008-2009 global financial crisis (GFC), despite the de-synchronised movements in house and commodity prices, according to the analysis by Fitch Ratings.

The weakening momentum was triggered by a protracted downturn in the housing market as declining houses prices dragged down construction activity which resulted in households holding back their spending.

On top of that, the Australian Prudential Regulation Authority (APRA) decided to tighten macro-prudential measures while, at the same time, banks implemented underwriting standards in recent years. This led to more cautious lending behaviour in the environment of the aftermath of the Royal Commission’s report.

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Despite the domestic economic momentum being somewhat weaker, export managed to surge thanks to commodity prices such as that of iron ore, the analysis said.

“This has provided a welcome cushion for the Australian economy - through direct higher income for businesses - whose commodity exports account for 60 per cent of goods exports, or 12 per cent of GDP,” the report read.

“However, despite positive commodity price tailwinds, we expect full-year 2019 Australian GDP growth to hit two per cent, its lowest since the 2008-2009 global financial crisis.”

The Fitch’s analysis also pointed out that historically the terms of trade tended to move in the opposite direction to house prices in the past.

“The de-synchronised nature of commodity and housing cycles has traditionally been a factor supporting the stability of the Australian economy, with higher commodity prices helping to offset negative spill-overs from weak house price, and vice versa. But this will not be powerful enough to prevent overall growth slowing to a ten-year low of two per cent in 2019,” Fitch Ratings’ forecast said.

“Nevertheless, we expect Australian growth to bottom out in the second half of this year on the back of the improvements in the terms of trade and easier economic policies.”



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