Research and analysis

Australia: slowing economy presents budget challenges

This publication was withdrawn on 1 August 2016

This publication was archived on 1 August 2016

This article is no longer current. Please refer to Overseas Business Risk - Australia

Economic growth slows to 2.5 per cent in 2014, validating the central bank’s decision to cut interest rates. Foreign investment rules are to be tightened in agriculture and residential property. An inter-generational report outlines long-term fiscal and productivity challenges. The May budget is expected to plot an easier path in deficit reduction.

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Detail

  1. Official figures released on 4 March show annual economic growth of 2.5% in 2014, following a 0.5% rise in GDP recorded in the December quarter. Annual growth has slipped below trend (3%) over the past six months as high resource-sector investment unwinds faster than the wider economy picks up.

  2. In 2015’s story of global monetary policy divergence, Australia has switched camps. After earlier expectation of rate rises this year, the central bank cut interest rates to 2.25% in February following a downward reappraisal of the growth outlook for 2015-16. Further cuts this year have been signalled. This is further fuelling house-price growth in Sydney and Melbourne, pushing regulators towards further macro-prudential lending controls on banks.

Foreign investment curbs

  1. On 25 February, the Abbott government proposed stricter inward foreign investment rules. Lower review thresholds for purchases in the agricultural sector would mean Treasurer Joe Hockey must approve any farmland purchase that would take a foreign entity’s total landholdings above $15m (£7.5m). Agribusinesses will be subject to a $55m threshold per individual purchase. These thresholds compare to $252m (higher in some FTAs) for businesses in other sectors. All foreign investors would be charged application fees to cover review costs. A national register of foreign-owned agricultural land will be established. There is a renewed commitment to enforce current laws preventing foreign investors buying existing residential dwellings (they can only buy new-builds).

Long-term budgeting

  1. The government this week released the country’s fourth five-yearly “intergenerational report” (IGR) looking ahead 40 years to assess demographic changes for their budget implications. It forecasts a population growing and ageing. Workforce participation declines and productivity growth stays flat at 1.5%, absent new policy measures. The IGR underscores the need for structural repair of the budget to bring revenue and expenditure back into line and concludes that “reforms to enhance productivity will be crucial if we are to achieve the growth in living standards enjoyed since the mid-1970s”. Hockey has subsequently called on the Senate and opposition to pass blocked budget measures.

  2. The report refers to current climate policies and states Australia will “join with the international community” to establish post-2020 targets.

Slow growth transition

  1. For now, the desired transition from mining-led growth to the wider economy is slow and patchy. Strong housing construction levels are the bright spot. Non-mining business investment has picked up but surveys portend downturn this year. A lower currency, down 17% against the US dollar since mid-2014, is yet to show much positive impact. Unemployment rose to 6.4% in January, the highest rate in 13 years and well above the financial-crisis peak, adding to political pressure on the government. Yet with the currency, petrol prices and interest rates all lower than in 2014, further slowdown should be limited. Hockey said the Australian economy was doing relatively well, “comparable to the best performing developed nations, such as the UK and Canada”.

  2. Further details on GDP, the IGR and foreign investment in the attached Quarterly Update.

  3. In tightening foreign investment rules, the Abbott government is responding to concerns that foreign buyers are buying up rural land and driving up capital-city house prices. Hockey has also ordered the forced sale of a $39m Sydney Harbour mansion found to be illegally purchased by a Chinese entity (reportedly controlled by China’s 15th richest man, Xi Jiayin). Of the 11% of farmland estimated in foreign hands, UK, US and Canadian interests hold the most with the Chinese around 1%.