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THINK Australia: Outlook for the Aussie dollar

Research

The Australian economy is going through a change in growth. Harry Tan (Head of Research, Asia-Pacific) discusses its future.

The end of the global commodities bull cycle, which partly reflects the softening growth in China and other emerging markets, has dampened and re-distributed economic growth during the past 2-3 years. The slowdown in China, which accounts for about one third of Australian exports, has overshadowed external demand. Lower commodity prices and the drag on growth from falling mining investment (c.1% reduction from GDP growth each year), have led to downward pressure on Australia’s fiscal position. Furthermore, growth has moderated as a result of the recent regional slowdown, having benefited from the rising interdependence in trade and investments with Asia over the past decade.

That said, the economy ended 2015 on a relatively strong note and is rebalancing away from mining-led growth. Australia is benefiting from a lower cash rate and weaker currency. Economic indicators have shown lower interest rates translating into stronger consumer cash flow, which has then helped to underpin the ongoing housing construction cycle. The depreciation of the AUD/USD (from 1.1 to around 0.7 presently) has helped ease import competition faced by domestic producers, while boosting activities in key export sectors such as agriculture, tourism and education.

After recording 3.6% GDP growth at the peak of the current growth cycle, GDP has averaged 2.9% during 2014-2015. Growth prospects are expected to remain relatively strong during 2016, where it is projected the economy will expand by about 2.7%. It will further gain momentum heading into 2018, with averaged forecasted growth over the next five years running at about 2.8%.

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Harry Tan

Harry Tan

Head of Research, Asia-Pacific

Harry's biography