Australia Business Forecast Report Q3 2009

Publication Date	June 2009
Publisher	Business Monitor
Product Type	Report
Pages	58
ISBN Number	1745-0470
Product Code	BMI03939

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Summary

Australia's economic prospects have continued to deteriorate as a result of the global slump, and we stick to our long-held belief that it will have entered recession in Q109. While the economy will receive a boost from the wide range of policy measures - both monetary and fiscal - these are unlikely to prevent it from slipping into a more prolonged period of downturn. The slowdown will be led by falling rates of private consumption growth and investment, while low commodities prices will continue to have an adverse effect on the country's terms of trade. In light of these dynamics, we reiterate our 2009 and 2010 real GDP growth forecasts of -1.5% and 1.2%, and now foresee growth setting in at an average pace of 2.7% in the years thereafter.

On the political front, the sharp deterioration of economic conditions means that policymakers are facing a difficult year. One of the main challenges will be containing the rise of unemployment, which has accelerated markedly since Q308 and is likely to continue doing so in the coming 18 months. While the Rudd administration has already adopted a series of spending measures to support the economy, these will contribute to a considerable fiscal deficit, leaving him open to accusations of mismanagement. The government is also facing pressure to press ahead with its environmental agenda, including the contentious carbon trading scheme which has yet to make it through parliament.

After cutting interest rates by a total of 425bps in the six months to February 2009, we expect the Reserve Bank of Australia (RBA) to trim another 50bps from the official cash rate, which would take it to a new record low of 2.50%. Coupled with the Treasury's spending plans unveiled in the FY2009/10 budget, the reductions should provide some boost to domestic demand, but probably less than the authorities are hoping. On the other hand, lower rates will relieve some pressure off Australia's households and corporations, both of which are highly indebted by international standards.

While Australia benefits from a strong business environment, its policy on inward investment is likely to be a flashpoint in the coming months as slumping commodity prices and a depreciating exchange rate leave Australian firms vulnerable to foreign acquisition. Recent investment proposals by foreign - and specifically Chinese - firms into the resource extraction sector have resulted in widespread calls for protectionism, with government rulings still pending in some of the biggest cases. While we do not expect a dramatic shift in the country's business environment, we caution that local regulators may become more active in blocking deals that are perceived to be against the national interest, which itself has become somewhat nebulous.

Content

Executive Summary
- Path To Recovery Still Uncertain
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Political Outlook
- With Economic Downturn Comes Political Uncertainty
- As economic conditions in Australia continue to deteriorate amid the global recession, local policy makers are coming under growing pressure to protect and support the Australian economy
- Foreign Policy
- Delicately Balancing Washington And Beijing
- Although Australia and China have enjoyed cordial ties in recent years, with the former benefiting from the latter's economic expansion, Canberra may find it increasingly difficult to balance its commercial ties with Beijing and its deep military ties with Washington
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Mild Recession, Modest Recovery
- The deterioration of economic conditions in Australia in Q408 and thereafter was broadly in line with our expectations of a sharp slowdown, and gives credence to our 2009 real GDP growth forecast of -1.5%
- Monetary Policy
- Easing Cycle On A Moderating Path
- In view of the RBA's decision to leave the cash rate on hold at 3.00% on May 5, we believe that the current rate-cutting cycle is moving into a lower gear
- Fiscal Policy
- Deep In The Red
- In line with our broad view on the deteriorating state of public finances in Australia, the government announced large increases in fiscal borrowing and expenditure on May 12
- Energy Policy
- Carbon Trading: Delayed Until 2011
- Despite being a central promise of Kevin Rudd's 2007 electoral campaign, Australia's ambitious plan to reduce greenhouse gas emissions is unlikely to be implemented until 2012, or possibly even later
Chapter 3: 10-Year Forecast
- The Australian Economy To 2018
- Long-Term Growth Prospects Still Solid
- Beyond the current downturn, Australia's economic prospects remain solid
Chapter 4: Special Report
- The Outlook For Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Textiles And Clothing
- Executive Summary
- BMI expects textile and clothing exports to shrink by 13.9% in 2009 (to US$465mn), with imports dropping by
- 5.4% (to US$5.93bn)
- Infrastructure
- Executive Summary
- Given that our macroeconomic team forecasts that Australia's anticipated recession will be driven in large part by a plunge in private consumption, the outlook for private sector-generated construction activity in 2009 appears grim indeed
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Political Overview
- Table: ECONOMIC ACTIVITY
- Table: MONETAR Y POLICY
- Table: AUSTRALIA N TREASURY STILL TOO OPTIMISTI C?
- Table: Long -Term Macroeconomic Forecasts
- Table: LOAN-TO-DEPOSIT RATI OS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATI NGS, SELECTED STAT ES
- Table: BMI BUSINESS AND OPERATI ONAL RISK RATI NGS
- Table: BMI LEGAL FRAMEWORK RATI NGS
- Table: ASIA, FDI ANNUAL INFLOWS
- Table: BMI TRADE RATI NGS
- Table: TOP EXPORT DESTI NATI ONS
- Table: Textiles And Clothing Production And International Trade, 2006-2013
- Table: Australia - Economic And Construction Data
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL & REGIONAL REAL GDP GROWTH
- Table: EMERGING MARKETS
- Table: COMMODITIES