The lowdown on Australian Economic Growth

While there are plenty of experts willing to provide predictions on Australia’s economic growth in 2019, it’s hard to get a consensus on what this year might actually bring. In terms of Australia’s economic position up to this point, growth has been strong. In fact, between 1991-92 and 2017-18, Australia’s economy grew by an average rate of 3.2% per year in real terms¹.

Having reached its 28th year of uninterrupted annual economic growth, Australia enjoys an achievement unmatched by any other developed nation over this period, with an average growth rate surpassing that of all major developed economies, including the United States (2.5%), the United Kingdom (2.1%), France (1.6%), Germany (1.4%) and Japan (0.9%)².

While some may point to Mining and Resources as the source of this economic good health, statistics show that almost three quarters of economic output is generated by Service sectors. Australia’s financial services industry is in fact, the country’s largest contributor to production, generating 9.5% of the nation’s total gross value added (GVA)³.

Following close behind, the Construction sector creates 8.1% of total GVA, Health Care & Social services is at 7.9%, while the Professional, Scientific and Technical services sectors at 7.4% are larger than Australia’s Mining and Manufacturing industries, at 6.4% and 6.3% of GVA respectively⁴.

So, what does 2019 hold for Australia’s economy? While predictions may vary, there are contributing factors that point to a possible answer. Instead of making predictions, let’s look at the four major contributing factors that may affect Australian economic growth in the coming year: GDP, the housing market, employment, and inflation.

GDP Growth

Let’s start with GDP. Economic growth is measured by the increase in a country’s total output, or real Gross Domestic Product (GDP). This GDP is the total value of all final goods and services produced within a country over a period of time. That means, an increase in GDP is the increase in a country’s production.

Factors that may positively impact a country’s GDP can include its natural resources and how it manages them, as well as its investment in physical capital and infrastructure, such as factories, machinery, and roads. GDP may also be influenced by a growing population and the availability of labour, and the investment made in human capital, such as the training of the labour force.

A country’s technological advancement may also positively influence GDP, for example improving productivity with the same levels of labour, allowing for accelerating growth and development. Lastly, the final main factor that can affect GDP for the better is a country’s legal framework, in the ways it regulates economic activity.

What does that mean for Australia? According to the International Monetary Fund’s (IMF) World Economic Outlook April 2018⁵, between 2019 and 2023 Australia’s economy is predicted to outperform every other major advanced economy. This is supported by the country’s close proximity to the dynamic Asian region, strong economic fundamentals, and a selection of globally important industries that represent high growth opportunities for the future.

Housing Market

With a change in gear for Australia’s housing market, there’s really no telling how this may affect the country’s economic outlook. While we look at this more closely in our post the property market in 2019, Australia’s housing market has certainly seen some important changes in the past year, with significant declines in both the Sydney and Melbourne markets.

According to the International Monetary Fund’s annual appraisal of Australia, house prices fell 4.1% throughout Australia in the preceding 12 months, while Sydney saw a drop of 8.1% and Melbourne 5.8%. However, perhaps putting this into perspective, the report also showed just how far the housing market had risen in the ten years prior, with national house prices rising 70%, Sydney house prices by around 100%, and Melbourne house prices by 90%⁶.

What is causing these changes then? For the most part, supply of homes and supply of loans. With a large number of housing projects being completed, there is now a larger supply of housing available, which works to decrease demand, and therefore prices. Tighter lending conditions have also made it more difficult for investors to get loans.

With a possible change in government on the horizon, leading to potential policy changes that could affect the property market, this has all worked together to create something of a downturn in confidence and momentum.

Employment & Inflation

With economic growth comes jobs. However, with economic growth predicted to remain at around 2.5-3%, it’s unlikely the labour market will increase significantly to cause unemployment or underemployment to fall. This means wages growth will also likely remain weak. As other sources of inflationary pressure are also expected to remain low, inflation may fall⁷ alongside the cash rate.

Of course, there are plenty of other contributory factors that may affect the Australian economy for the better or the worse. From the escalating trade war between China and the United States and the state of both their economies, to the Federal election in May, Brexit in March, and even the potential impeachment of US President Donald Trump following Robert Mueller’s investigation, there is plenty going on this year which could send ripples around the world.

Learn more about the latest market insights and the year ahead in the latest edition of Angle Magazine where we discuss why it’s important to understand investment risk, diversifying your SMSF and share our thoughts on the property market outlook for 2019.