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Australia Business Forecast Report Q2 2011
Business Monitor International, March 2011, Pages: 50
ALP Government Increasingly Challenged
The Australian economy experienced a slowdown in Q310, growing by a sluggish 0.2% quarter-on-quarter (q-o-q) (seasonally adjusted) from a revised 1.1% recorded in the preceding quarter. The recent deceleration in Australia’s headline real GDP growth was consistent with our below-consensus growth forecast of 2.8% for 2010. Indeed, we believe the recent tightening in borrowing costs and weakening consumer confidence will act as key headwinds in 2011. In addition, the country also suffered major destruction and disruptions of economic activity owing to flooding in parts of Queensland and Victoria in January, followed by Cyclone Yasi in the north in February. In short, the resulting impact on the domestic economy should contribute to the slowdown in economic growth to 2.4% and 2.3% in 2011 and 2012 respectively.
The Australian Labor Party (ALP) government faces a number of key political challenges over the next two years, such as the 30% mineral resource rent tax, emissions trading scheme and the flood levy resulting from the Queensland floods. These issues representpotential stumbling blocks for the AL P administration given that it only controls a one-seat majority in the lower house. While we maintain our view that the AL P will successfully complete its three-year term, the risks to our outlook have risen substantially in 2011. Should the incumbent lose power, the rise of the business-friendly opposition Liberal-National Coalition may benefit Australian corporations. T he Reserve Bank of Australia decided to keep the cash rate at 4.75% in its first monetary policy meeting on February 1. This was unsurprising to us, as we believe the last round of interest hikes – ending with a 25-basis point rise in November 2010 – was successful in keeping inflation under control. Indeed, consumer price inflation came in at only 0.4% quarter-on-quarter in Q410, decelerating from the 0.7% figure in Q310. That said, we have increased our end-2011 cash rate target to 4.75%, from 4.50% previously, as Australian exports to China are now expected to be stronger on the back of firm Chinese growth.
In terms of our investment outlooks for Australia, we believe rising wealth levels in China and a shrinking Japanese economy should lead to a further rise in Asian fund flows into Australia. Indeed, with an open economy that promotes global trade and investment, Australia should be able to enjoy firm investment growth going forward. The Heritage Foundation, a US -based conservative think tank, ranked Australia third out of 92 countries in its 2011 Index of Economic Freedom, underscoring our view. The country scores 74.4 in our business environment rating, bolstered by strong scores in the infrastructure and institutions subcomponents, coming in at 75.0 and 78.2 respectively.
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