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Three risks facing the Australian economy

David Taylor

I worry a bit sometimes I spend far too much time ‘talking down’ the Australian economy. My goal though is to “tell it how it is”, rather than be a “doomsayer”.

I look at the boring numbers, so you don’t have to, then tell you a story. Hopefully that story’s an interesting one and you walk away knowing a little more than you did before.

I can tell you, right now, the economy’s looking just fine.

Also read: What is driving Australia's economic growth?

The unemployment rate has a “5” in front of it, inflation seems under control, and the economy looks set to grow anywhere between 1.8 and 3 per cent (depending on who you ask) over the coming years.

So, right now, economic life, for most, is OK.

I want to dig a little deeper though and highlight three areas of the economy that will likely make headlines over 2017. These are the areas to watch.

Unemployment

Australia has an unemployment rate of 5.7 per cent. That’s relatively low. It’s just a number, but it does reflect the fact that if you’d like a job, you’ve got a reasonable chance of landing one.

Now that’s fine as a broad statement, but what if I want a job in the mining sector? Or in construction, or architecture? And what if I want to work full time?

All of the above categories will likely see you meet some frustration. That’s because the economy is slowing shifting away from digging, building and constructing things… to services.

In fact that’s the latest Performance of Services Index lifted by 6.6 points to 57.7 in December – that’s the fastest pace of expansion since May 2007.

Jobs in the services sector range from bar tending, to financial planning, to tour guides and hotel operators. These jobs are great, but they’re often not full-time, and don’t carry a huge amount of job security.

In addition, Australia’s inflation rate (which includes your pay rises), is worrying low. That means your current pay packet is unlikely to be competitive… nor will it grow much in the next few years.

Is Australia’s jobs market better than most? Yes. Is it robust? No. Will it likely get worse? Probably not while interest rates are as low as they are.

Any deterioration in the jobs market, however, will likely spell trouble for the economy.

Interest rates

An interest rate is a funny concept, isn’t it? You’re basically saying you’re prepared to pay more for something, so that you can have it now.

Australian households are in love with debt. The latest “chart pack” from the Reserve Bank (with lots of lovely charts to summarise the national economy), shows household debt is now above 175 per cent of GDP. What does that mean? It means we’re up to our eyeballs in debt.

Why is that? It’s really simple. Interest rates are at historic lows. It’s never been cheaper or easier to borrow money. I won’t go into “why” here, but there’s a real possibility interest rates will climb higher this year. That’s unlikely to be as a result of official interest rate increases from the Reserve Bank, but rather commercial banks lifting their rates. Some banks have already started to lift their charges for investor loans.

My point simply is that we just don’t know how the economy will respond to materially higher interest rates, if they do indeed rise. Given the economy is only just keeping its head above water as it is, I suspect there could be a few convulsions if we did see rates creep higher.

Please keep an eye out for rising interest rates, and reduced discounts on mortgages this year. Just a little prudence will likely go a long way.

Also read: $A slips as US dollar rebounds

Growth

I mentioned above that Australian economic growth is OK. That’s certainly what the forecasts suggest. The Reserve Bank is forecasting growth of between 2.5 and 3.5 per cent over the year to December 2016, and to increase to 3–4 per cent over the year to June 2018. That’s impressive in anyone’s language.

Question marks were raised over those projections last quarter when, in the three months to September, GDP “growth” came in at -0.5 per cent – in other words, the economy produced less.

I’m pleased to tell you that there are now more positive signs for the December quarter. The trade balance for November, for instance, was actually positive. It’s the first time it’s been positive since March 2014. Imports were flat, while the value of exports jumped 8 per cent. The icing on the cake was that it came with higher prices too.

There are signs the services sector is expanding too. We’re talking pubs, clubs, financial services, and tourism. That sort of thing. It makes up a big chunk of the economy.

These are great signs. We can’t break out the champagne just yet though because the consensus is that the higher commodities prices we’re now enjoying won’t be maintained… and the boost in the services sector may just be a one-off – especially considered it was part of the lead-up to Christmas.

Key takeaways

There’s now real hope Australia has avoided a recession yet again. That’s terrific, obviously, but we’re not out of the woods yet.

Too many Australians are underemployed and aren’t earning enough. We’re also seeing exorbitant debt loads being carried by households. If the economic winds blow just a little stronger, and interest rates move higher, there’s very little supporting the economy.

The Reserve Bank may or may not adjust interest rates, but that’s now largely a moot point now. It’s up to the government to deliver targeted spending projects that’ll generate economic activity.

There’s also something else this great nation of our needs – a little bit of luck.

One big issue to keep an eye out for is China’s trade relationship with the US. If president-elect Donald Trump starts a trade war with Australia’s largest trading partner (imposing tariffs as much as 45 per cent on all of the country’s exports), all bets are off.

Let’s hope for the best.

David Taylor
David Taylor

David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.