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How will the Aussie economy perform in 2016?

The Australian economy is ending 2015 having delivered another year of economic growth.

At around 2.5%, the performance of the economy remains disappointingly weak.

But it is not all bad news.

Also read: 16 predictions for 2016 from the brightest minds in finance

The positive aspects for the economy in 2015 that resulted from record low interest rates, the very weak Australian dollar and what was a booming housing market were more or less offset by low and falling commodity prices and heightened anxiety about the strength of Australia’s market export market, China.

With that slightly disappointing background, the big test will be to see whether the economy can reach or even exceed its potential during 2016. If so, it would mean a year where real GDP growth was above 3%, with the unemployment rate falling below 5.5% and the inflation rate locked into the 2 to 3% target range set by the Reserve Bank.

As is often the case, the outlook for 2016 has several conflicting factors at play.

The pessimists point to the sharp falls in commodity prices as a major concern for the economy.

They are correct in terms of the severity of the downturn in that segment of the economy, but it needs to be remembered that mining in total accounts for well under 10% of the Australian economy.

Which begs the question, what is the outlook for the other 90%?

Also read: What lies ahead for Australia's economy?

The news there is generally good.

Consumer spending is holding up well, as is new housing construction, even if the bulk of the rapid growth in new housing starts may be topping out.

Sectors including tourism and education are booming.

Here the low Aussie dollar is encouraging tourists and students to come to Australia and spend their money here.

Indeed, tourism and education are setting up to be the drivers of export growth over the next year or two.

It is also the case that for most businesses that kept their heads above water when the Aussie dollar was above parity with the US dollar a couple of years ago, they are getting a huge competitive boost with the currency now around 70 US cents.

Here manufacturing and agriculture are doing well with rising exports after a tough period a couple of years ago.

The key point is that the Australian economy is poised to lift its growth rate into 2016.

Also read: Why Australia is not recession-bound

This is certainly not to say we are heading for boom-like conditions, rather growth is likely to exceed 3% during the course of the year, the unemployment rate is likely to fall slightly on the back of this faster rate of growth and when the government delivers the budget in May, it will likely show a narrower budget deficit than was presented in the recent mid year update.

For the RBA, it means interest rates will not be cut and that during the course of the year, it may start to give thought to the notion of lifting interest rates if the economic pick up is broadly based.

2016 should be a good year for the Australian economy, with the positive aspects working to add to economic growth overwhelming the problems that are associated with weak commodity prices.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.