bmi australia business forecast report q2 2014
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Published by Business Monitor international ltd
Business Forecast report
Q2 2014www.businessmonitor.com
austraLiaincludes 10-year forecast to 2023
Further Weakness On The Cards
issn 1745-0470published by Business Monitor international Ltd.
copy Deadline: 14 february 2014
2 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014a
us
tra
Lia
– M
ac
ro
ec
on
oM
ic in
Dic
ato
rs
201
3e
2014
f 20
15f
2016
f 20
17f
201
8f
201
9f
202
0f
202
1f
2022
f 20
23f
nom
inal
Gd
P, u
s$b
n [1
,3]
1,53
8.5
1,37
9.3
1,36
5.3
1,37
5.5
1,42
6.5
1,50
8.5
1,59
5.5
1,68
7.5
1,78
5.0
1,88
5.1
1,99
1.8
nom
inal
Gd
P, a
ud
bn [1
,3]
1,56
1.8
1,63
0.4
1,70
6.7
1,79
8.0
1,90
1.9
2,01
1.4
2,12
7.3
2,25
0.0
2,38
0.0
2,51
3.4
2,65
5.7
nom
inal
Gd
P, e
ur
bn [1
,3]
1,16
5.6
1,08
6.1
1,11
0.0
1,14
6.2
1,18
8.7
1,25
7.1
1,32
9.6
1,40
6.3
1,48
7.5
1,57
0.9
1,65
9.8
Gd
P p
er c
apita
, us
$ [1
,3]
63,2
4459
,981
58,8
0158
,670
60,2
5263
,111
66,1
2469
,301
72,6
5076
,031
79,6
38
Gd
P p
er c
apita
, eu
r [1
,3]
47,9
1247
,229
47,8
0548
,892
50,2
1052
,592
55,1
0457
,751
60,5
4263
,359
66,3
65
rea
l Gd
P g
row
th, %
y-o
-y [2
,3]
2.4
2.0
2.5
2.8
3.0
3.0
3.0
3.0
3.0
2.8
2.9
Priv
ate
final
con
sum
ptio
n, %
of G
DP
[1,3
]54
.454
.053
.553
.052
.552
.051
.551
.050
.550
.249
.8
Priv
ate
final
con
sum
ptio
n, re
al g
row
th %
y-o
-y [2
,3]
1.5
1.3
1.6
1.8
2.0
2.0
2.0
2.0
2.0
2.2
2.2
Gov
ernm
ent fi
nal c
onsu
mpt
ion,
% o
f GD
P [1
,3]
18.1
18.1
18.2
18.2
18.2
18.2
18.2
18.2
18.2
18.2
18.3
Gov
ernm
ent fi
nal c
onsu
mpt
ion,
real
gro
wth
% y
-o-y
[2,3
]2.
02.
03.
03.
03.
03.
03.
03.
03.
03.
03.
0
Fixe
d ca
pita
l for
mat
ion,
% o
f GD
P [1
,3]
28.5
28.5
28.7
29.0
29.3
29.6
29.9
30.2
30.5
30.5
30.6
Fixe
d ca
pita
l for
mat
ion,
real
gro
wth
% y
-o-y
[2,3
]2.
62.
03.
24.
04.
04.
04.
04.
04.
03.
03.
0
Pop
ulat
ion,
mn
[4]
23.3
23.6
23.9
24.2
24.5
24.8
25.1
25.4
25.7
26.0
26.3
Une
mpl
oym
ent,
% o
f lab
our f
orce
, eop
[3]
5.8
6.5
6.1
5.7
5.5
5.5
5.5
5.5
5.5
5.5
5.4
Con
sum
er p
rice
infla
tion,
% y
-o-y
, ave
[5]
2.4
2.3
2.1
2.5
2.7
2.7
2.7
2.7
2.7
2.7
2.7
lend
ing
rate
, %, a
ve [6
]6.
25.
75.
75.
96.
26.
46.
77.
27.
78.
28.
2
cen
tral B
ank
polic
y ra
te, %
eop
[5]
2.50
2.00
2.00
2.25
2.50
2.75
3.00
3.50
4.00
4.50
4.50
exc
hang
e ra
te a
ud
/us
$, a
ve [7
]1.
021.
181.
251.
311.
331.
331.
331.
331.
331.
331.
33
exc
hang
e ra
te a
ud
/eu
r, a
ve [7
]1.
341.
501.
541.
571.
601.
601.
601.
601.
601.
601.
60
Bud
get b
alan
ce, u
s$b
n [8
]-3
2.0
-38.
0-3
7.1
-33.
6-3
0.3
-27.
2-2
3.6
-19.
6-1
7.3
-15.
7-1
4.9
Bud
get b
alan
ce, %
of G
DP
[8]
-2.1
-2.8
-2.7
-2.4
-2.1
-1.8
-1.5
-1.2
-1.0
-0.8
-0.7
Goo
ds a
nd s
ervi
ces
expo
rts, U
S$b
n [9
]27
5.9
269.
527
5.9
281.
930
5.2
324.
934
4.4
363.
738
4.0
405.
642
4.8
Goo
ds a
nd s
ervi
ces
impo
rts, U
S$b
n [9
]28
6.4
270.
027
0.6
273.
128
5.3
299.
031
4.6
331.
134
8.4
366.
738
6.0
Bal
ance
of t
rade
in g
oods
and
ser
vice
s, U
S$b
n [9
]-1
0.5
-0.5
5.3
8.9
19.9
25.9
29.8
32.6
35.6
38.9
38.8
Bal
ance
of t
rade
in g
oods
and
ser
vice
s, %
of G
DP
[9]
-0.7
-0.0
0.4
0.6
1.4
1.7
1.9
1.9
2.0
2.1
2.0
cur
rent
acc
ount
bal
ance
, us
$bn
[9]
-42.
7-2
8.7
-18.
9-1
2.0
1.2
8.8
14.4
19.1
24.2
29.6
30.8
Cur
rent
acc
ount
bal
ance
, % o
f GD
P [9
]-2
.8-2
.1-1
.4-0
.90.
10.
60.
91.
11.
41.
61.
5
Fore
ign
rese
rves
ex
gold
, US
$bn
[9]
41.3
44.1
46.9
49.7
52.5
55.3
58.1
60.9
63.8
66.7
69.7
Impo
rt co
ver,
mon
ths
[9]
1.7
2.0
2.1
2.2
2.2
2.2
2.2
2.2
2.2
2.2
2.2
Not
es: e
BM
I est
imat
es. f
BM
I for
ecas
ts. 1
Cal
enda
r Yea
rs; 2
Cal
enda
r Yea
rs, B
ase
Yea
r = F
Y20
08/0
9 (J
uly-
June
). S
ourc
es: 3
AB
S/B
MI c
alcu
latio
n; 4
Wor
ld B
ank/
UN
/BM
I; 5
RB
A/B
MI c
alcu
latio
n; 6
IMF;
7 B
MI;
8 A
BS
/BM
I cal
cula
tion,
adj
uste
d to
cal
enda
r-ye
ar b
asis
; 9 A
BS
/BM
I.
executive summary ................................................................................................................................. 5core Views ......................................................................................................................................................................................5Major Forecast changes ................................................................................................................................................................5Key risks to outlook ....................................................................................................................................................................5
chapter 1: political outlook .................................................................................................................... 7sWot analysis .......................................................................................................................................................... 7BMi political risk ratings ........................................................................................................................................ 7Domestic politics ...................................................................................................................................................... 8political Gridlock could cause climate change policy Vacuum ..............................................................................................8
The issue of climate change remains at the forefront of the political gridlock in the Australian Senate, and we believe that the ruling Liberal-National coalition will eventually concede to business-led pressures and amend its Direct Action Policy.
taBle: Political overview .............................................................................................................................................................................. 8
taBle: Minority Parties & indePendents within the australian senate ...................................................................................... 9
Long-term political outlook .................................................................................................................................. 10three Key challenges: population, climate change, china ....................................................................................................10
The Australian political scene is expected to remain stable over the coming decade, although it will still face a number of key challenges. The most salient are managing population growth, climate change and relations with China.
chapter 2: economic outlook ............................................................................................................... 13sWot analysis ........................................................................................................................................................ 13BMi economic risk ratings ................................................................................................................................... 13economic activity ................................................................................................................................................... 14Weak Job Market print suggests Further slowdown ahead ...................................................................................................14
The greater-than-expected job loss print recorded in December 2013 is in line with our outlook for Australia's unemployment rate to head higher in 2014.
taBle: econoMic activity .............................................................................................................................................................................. 14
Fiscal policy ............................................................................................................................................................. 15Weaker Federal Finances to intensify pressure on states .....................................................................................................15
The lack of fiscal expenditure reforms in Australia continues to support our downbeat outlook for public finances.
taBle: fiscal Policy ........................................................................................................................................................................................16
Monetary policy ....................................................................................................................................................... 17economic Deterioration to reignite rBa's easing Bias in H214 ...........................................................................................17
We maintain that the Reserve Bank of Australia (RBA) will return to its easing bias in H214 despite having held its key policy rate at an all-time low of 2.50% in its February 4 meeting.
taBle: Monetary Policy.................................................................................................................................................................................17
Balance of payments .............................................................................................................................................. 19Trade Positives Insufficient To Support AUD In 2014 ...............................................................................................................19
Reductions in capital imports by businesses in Australia have been a key driver underpinning the narrowing of the trade deficit, which came in at AUD118mn in November in seasonally-adjusted terms.
taBle: current account ............................................................................................................................................................................... 20
chapter 3: 10-Year Forecast .................................................................................................................. 23the australian economy to 2023 ........................................................................................................................... 23exports and immigration Key For Long-term Growth ..............................................................................................................23
Australia’s real GDP growth is expected to remain firm, averaging 2.8 % in the 10-year period from 2014 to 2023. In particular, we believe commodity exports and a renewed interest in skilled immigration will be key drivers in helping the economy return to its trendline growth of around 3.0% from 2017 onwards, following a slowdown in 2012-2016.
taBle: lonG-terM MacroeconoMic forecasts .................................................................................................................................... 23
3Business Monitor International Ltd www.businessmonitor.com
contents
chapter 4: Business environment ........................................................................................................ 27sWot analysis ........................................................................................................................................................ 27BMi Business environment risk ratings ............................................................................................................. 27Business environment outlook ............................................................................................................................ 28Trans Pacific Partnership: Conclusion To Remain Elusive In 2014 ........................................................................................28
In line with our expectations, the group of 12 negotiating countries missed the 2013 deadline to reach a consensus on the draft outline for the Trans-Pacific Partnership (TPP). We believe that negotiations in 2014 are unlikely to fare any better as non-goods clauses remain the key stumbling block. Apart from domestic opposition in various countries, elections due at the end of 2014 for New Zealand and the US are likely to reduce the amount of time available for negotiators. We maintain our expectations for a much smaller pact to be concluded, and even then, believe that chances of a deal in 2014 are small.
Business environment............................................................................................................................................ 29institutions ............................................................................................................................................................... 29taBle: BMi Business and oPeration risk ratinGs ................................................................................................................................ 29
taBle: BMi leGal fraMework ratinG ......................................................................................................................................................... 30
infrastructure ........................................................................................................................................................... 31taBle: laBour force Quality ...................................................................................................................................................................... 31
taBle: asia – annual fdi inflows .............................................................................................................................................................. 32
Market orientation ................................................................................................................................................... 33taBle: trade and investMent ratinGs ..................................................................................................................................................... 33
taBle: toP exPort destinations, 2002-2009 ............................................................................................................................................. 34
operational risk ...................................................................................................................................................... 35
chapter 5: Key sectors .......................................................................................................................... 37autos ........................................................................................................................................................................ 37taBle: autoMotive sales, 2011-2017............................................................................................................................................................ 38
taBle: autos Production, 2011-2017 .......................................................................................................................................................... 39
taBle: autos trade, 2011-2017 ...................................................................................................................................................................... 40
Food and Drink ........................................................................................................................................................ 41taBle: food consuMPtion indicators – historical data & forecasts, 2013-2018 .................................................................... 41
taBle: alcoholic drinks value/voluMe sales – historical data & forecasts, 2013-2018 .................................................... 42
taBle: Mass Grocery retail sales By forMat – historical data & forecasts, 2013-2018 .................................................... 43
other Key sectors ................................................................................................................................................... 45taBle: telecoMs sector key indicators ................................................................................................................................................ 45
taBle: defence and security sector key indicators ....................................................................................................................... 45
taBle: PharMa sector key indicators .................................................................................................................................................... 45
taBle: oil and Gas sector key indicators ............................................................................................................................................. 46
taBle: infrastructure sector key indicators ................................................................................................................................... 46
taBle: freiGht key indicators .................................................................................................................................................................... 46
chapter 6: BMi Global assumptions .................................................................................................... 47Global outlook ......................................................................................................................................................... 47Fairly Benign prognosis... With risks ........................................................................................................................................47taBle: GloBal assuMPtions.......................................................................................................................................................................... 47
taBle: develoPed states, real GdP Growth, % ................................................................................................................................... 48
taBle: BMi versus BlooMBerG consensus real GdP Growth forecasts, % ............................................................................ 48
taBle: eMerGinG Markets, real GdP Growth, % .................................................................................................................................. 49
4 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
core Views The Australian economy continues to struggle to stay above water,
as domestic demand continues to show signs of weakening. We
maintain our downbeat outlook for the economy and the currency,
projecting GDP growth to come in at 2.0% for 2014 and the cur-
rency to weaken to US$0.82/AUD by the end of the year. For one,
the manufacturing sector continues to battle high costs and stiff
competition from cheap imports. Secondly, the mining sector could
face even greater stress as firms seek to re-evaluate their projects
in light of a slowing Chinese economy and weak commodity prices.
We believe that the housing market remains precarious, as af-
fordability of homes continue to edge to new lows. Given our poor
outlook for the Australian job market in 2014, in which we forecast
unemployment to reach 6.5% by the end of the year, we believe
that demand for housing will decline. The overextended household
balance sheets further augur the growth in housing-related credit
growth. In our opinion, the Australian banking sector is the sector
most leveraged on the housing market and we expect that declines
in house prices will adversely impact the industry.
The Liberal-National coalition’s popularity has been on the decline
since winning the elections in September 2013. Its government
remains hampered by a fragmented Senate, which threatens any
reform push by the government. The government has also decided
to push back the target date on its fiscal surplus, which is in line with
our view. Given the federal government’s restrained policy-making
ability, we believe the state government is likely to step up to the
plate and push through reforms at the state level.
We maintain our forecast for the Reserve Bank of Australia (RBA)
to hand out another 50 basis points worth of cuts in H214, bringing
the cash rate to 2.00% by end-2014, even though the near-term
economic outlook has improved. Indeed, we expect that a weak
currency will only provide some reprieve against the mining sector
slowdown while slow the hollowing of Australia’s manufacturing.
Thus, we believe that central bank will continue to attempt to stave
off a decline in credit growth by easy monetary conditions when
price pressures ease.
Major Forecast changes We have dialled back our outlook for a fiscal surplus, expecting the
government to only achieve a primary balance surplus in FY2020/21,
versus our previous projections for a fiscal balance surplus. The Ab-
bott government’s Direct Action plan – which will incentivise carbon
abatement rather than penalise excess carbon emissions – is likely
to cost the government more than the AUD1.55bn that has been
set aside. While we believe that the lack of support from minority
parties could help prevent the government from implementing new
spending policies, we see greater risks from the lack of cutbacks
planned. Hence we have revised down our fiscal outlook, expecting
rehabilitation of public accounts to occur much further down the road.
We have raised our medium-term outlook for Australia’s trade account,
on the back of increased liquefied natural gas (LNG) processing
capacity currently under construction. Given that gas exports could
account for 15-20% of overall exports by 2017, we have revised
our forecast to expect a sharper widening of the trade balance from
2015, and subsequently, a surplus in the current account by 2017.
However, in the near term, we expect these projects to place pres-
sure on import growth, hence resulting in a slower narrowing of the
trade deficit over the 2014-2016 compared to our previous forecast.
Key risks to outlook Policies implemented by major economies like Japan, China and the
US will likely have a significant impact on Australia. For example,
Japan’s policy direction on its use of nuclear power could have a
drastic impact should it decide to turn its reactors back on. Should
Japan, the US and/or China enact more stimulus as their economies
lose traction in 2014, the rebalancing in Australia could be delayed
as the Australian dollar could face appreciatory pressures while
demand for Australia’s mineral exports remain supported.
Australian banks continue to be highly exposed to the domestic
housing market. Given its reliance on external markets for funding,
the banks could face a liquidity crisis should external counterparts
withhold funding due to the deterioration of its balance sheet as the
housing market sours. In order to prevent financial panic, government
intervention could be needed in this scenario, which could force the
budget deficit into double-digit territory.
5Business Monitor International Ltd www.businessmonitor.com
executive summary
Brief Methodology
7Business Monitor International Ltd www.businessmonitor.com 7Business Monitor International Ltd www.businessmonitor.com
sWot analysis
strengths Australia is a mature democracy with a broadly stable party system.
Economic stability over recent years supports the current political
system and radical groups are unlikely to gain substantial support.
Weaknesses As one of the region’s largest and most stable states, the country
attracts many refugees and economic migrants. The issue is a key
source of domestic tension and has been hotly debated in parlia-
ment in recent times as the capsizing of a boat led to the death of a
number of refugees. The issue continues to be debated in the federal
parliament with no sign of political parties co-operating to find an
alternative that would ensure the safe passage and fair processing
of the refugees, while reducing the possibility of people smuggling.
The fragility of the state governments’ finances compared to the
large infrastructure projects that they need to undertake has led to
questions with regards to the compatibility of the federal-state system
with the country’s current development needs.
opportunities Australia has historically enjoyed close military ties with the US.
However, with the rise of regional economic powers such as China,
it will need to balance competing military and economic ties.
threats Australia’s early support for the US ‘War on Terror’, among other
things, has made Australians abroad a target for Islamic extremists.
Australia’s close alliance with the US, particularly under John Howard,
has left a lingering feeling among some Asian governments that it
is America’s ‘deputy sheriff’ in the region.
BMi political risk ratingsAlthough the Liberal-National coalition was awarded a solid majority in
the parliamentary election held on september 7 2013, the new govern-
ment will face difficulties as a host of smaller parties can block its bills
as it does not have enough seats in the Senate. While the short and
long-term political outlook remains stable (hence our ratings at 81.0 and
83.0 respectively), we see that growing risks of important reforms being
delayed given that the minority parties such as mining magnate Clive
Palmer’s Palmer United Party (PUP) have been rather aggressive with
their demands. Indeed, Prime Minister Tony Abbott’s goal to implement his
Direct Action policy by July 2014 looks increasingly difficult to accomplish.
Chapter 1: political outlook
s-t political rank trendnorway 97.9 1 =Switzerland 96.9 2 =denmark 94.4 3 =canada 94.0 4 =Austria 91.5 5 =sweden 89.0 6 =finland 88.8 7 =United States 84.6 8 =Germany 84.4 9 =New Zealand 84.0 10 =Japan 83.5 11 =Netherlands 83.5 12 =iceland 83.5 13 =united kingdom 82.5 14 =france 81.7 15 =australia 81.0 16 =ireland 79.2 17 =italy 74.8 18 =Portugal 70.2 19 =Belgium 66.7 20 =spain 65.0 21 =Cyprus 51.9 22 =Greece 40.4 23 =Regional ave 81.7 / Global ave 64.4 / Emerging Markets ave 61.9
L-t political rank trendSwitzerland 98.5 1 =norway 98.0 2 =sweden 94.5 3 =canada 94.2 4 =denmark 93.5 5 =Austria 92.0 6 =finland 91.8 7 =iceland 89.8 8 =Japan 88.1 9 =ireland 88.0 10 =Germany 87.8 11 =United States 87.6 12 =france 86.2 13 =Netherlands 85.5 14 =New Zealand 84.1 15 =Portugal 83.8 16 =australia 83.0 17 =united kingdom 82.5 18 =italy 80.5 19 =Belgium 80.3 20 =spain 77.2 21 =Cyprus 71.9 22 =Greece 62.6 23 =Regional ave 86.8 / Global ave 62.6 / Emerging Markets ave 59.0
Domestic politics
political Gridlock could cause climate change policy Vacuum
BMi VieWThe issue of climate change remains at the forefront of the politi-
cal gridlock in the Australian Senate, and we believe that the ruling
Liberal-National coalition will eventually concede to business-led
pressures and amend its Direct Action Policy. However, given the
stronger bargaining positions of the cross-benchers and their grow-
ing demands, we believe that negotiations will be lengthy and could
significantly delay the proposed policy beyond the coalition's July
2014 target. Indeed, with the coalition keen on repealing the Clean
Energy Act, we see the growing risk of a policy vacuum, which will
likely dampen the private sector's interest to invest in Australia's clean
energy sector.
Political gridlock in the Australian Senate, the upper chamber
of parliament, could stall policy changes and further weigh
on the outlook for Australia's economy (see, 'Policy Changes
May Be Held Back By Senate Politics', September 9 2013).
The issue of climate change is at the forefront of the gridlock,
and we believe that the ruling Liberal-National coalition will
eventually concede to business-led pressures and amend its
Direct Action Policy, which primarily seeks to award companies
funds to allow them to pursue projects that would reduce the
firm's emissions. This is in contrast to the Clean Energy Act,
under which the excess carbon emissions were taxed.
That said, we highlight that this scenario could result in a
period of policy vacuum. Indeed, we believe that with little
business support for the proposed Direct Action (with several
implementation problems that companies and think tanks have
pointed out), as well as growing demands by cross-benchers, the
coalition government will be pressured to amend the landmark
policy (possibly changing it).
8 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: poLiticaL oVerVieWSystem of Government Parliamentary democracy, universal suffrage: 150-seat house of representatives (three-year term) and 76-mem-
ber senate (six-year term). Executive power rests with prime minister.
Head of State Queen Elizabeth II, represented by Governor General Quentin Bryce, September 5 2008-
Head of Government Prime Minister Tony Abbott, September 18 2013-
Last Election Parliamentary – september 7 2013
Composition of Current Government liberal-national coalition
Key Figures Deputy Prime Minister & Minister for Infrastructure & Regional Development – Warren Truss; Treasurer – Joe Hockey; Minister for Foreign Affairs – Julie Bishop; Minister for Defense – David Johnston; Minister for Finance – Mathias Cormann; Central Bank Governor – Glenn Stevens.
Main Political Parties (Seats won in Aug. 2010 elections in brackets)
Liberal Party (58): Centre-right, conservative. Founded in 1944. Led by Tony Abbott. (Includes 22 seats from the Liberal National Party, an affiliated party in Queensland.)
Australian Labor Party (55): Centre-left, traditionally social-democratic. Founded in 1891. Led by Bill Shorten.
National Party (9): Centre-right, conservative. Founded in 1920. Led by Warren Truss.
Country Liberal Party (1): Centre-right. Founded in 1974. Affiliated with both the National and Liberal parties. Led by Adam Giles.
Australian Greens (1): Environmentalist, liberal. Founded in 1992. Led by Christine Milne.
next election Parliamentary – 2016
Key Relations/Treaties Australia is a member of the UN, the British Commonwealth, the Australia, New Zealand, US Security Treaty (ANZUS) and the Pacific Islands Forum. It has close relations with the Association of Southeast Asian Nations and is also a US major non-NATO ally.
BMI Short-Term Political Risk Rating 81.0
BMI Structural Political Risk Rating 83.0
Source: BMI
is Direct action necessary?National Emissions, Quarterly-Moving-Sum & By Sector
Source: BMI, Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education
Moreover, the resultant policy uncertainty is likely to have an
adverse impact on the willingness of power producers and large
industrial users (such as aluminum smelters and mining com-
panies) to embark on large-scale investments, further weighing
on Australia's slowing economy.
costs and effectiveness to Hamper implementation of Direct actionFirstly, we believe that the coalition's proposed Direct Ac-
tion policy will require significant changes its mechanisms
to address the uncertainties surrounding the plan's cost and
effectiveness. At the proposal's core is a AUD1.55bn fund
which companies can seek funds from to finance their efforts
to reduce emissions. Theoretically, funds will be awarded
to the lowest cost project submitted by companies through a
tender process, as long as they are equal to or less than the
benchmark price for carbon abatement that the government
sets. This benchmark price, however, will be withheld from
companies submitting these 'bids'.
While the free-market-type mechanism is to be lauded, we see
problems with the estimation of costs and actual effectiveness
of these projects. Carbon storage and sequestration are very new
technologies; and as such, the actual effectiveness and costs are
relatively unknown and difficult to forecast. Given these prob-
lems we see the potential for cost escalation, which would mean
that the current budget of AUD1.55bn set aside to fund these
projects might not be sufficient to meet the emissions target set
at a level of 537 megatonnes of carbon dioxide equivalent (MT
CO2), or 5% below emission levels recorded in 2000.
Moreover, the commercial-in-confidence benchmark price for
carbon abatement makes it difficult for businesses to decide
which projects will be able to make the cut. This could reduce
the willingness of companies to tender submissions and, hence,
ultimately reduce the effectiveness of the scheme.
need For cross-Bench support to Drive changes and DelaysAlthough businesses have no direct means to pressure the
government to make these changes, we believe that the cross-
benchers will undertake this role, given their strengthened
bargaining positions due to the government's need for support
to pass the bill into law. This improved position, however,
also suggests that the demands from cross-bench members are
likely to increase. Indeed, no minority party or independent
has expressed full support for the Direct Action proposal, and
minority parties like the Palmer United Party's (PUP) have
asked for an increase in funding to allow them to better review
the government's policy.
With only 33 out of the 76 Senate seats, the coalition govern-
ment will need the support of six other members of the Senate
to amend or approve a bill. Although the government has so
far appeared determined not to concede to the demands from
9Business Monitor International Ltd www.businessmonitor.com
political outlook
taBLe: MinoritY parties & inDepenDents WitHin tHe austraLian senateMinority party/independent number of senate seats Held support repeal of
clean energy act support For coalition’s Direct action policy
Palmer United Party (PUP) 2 Yes Unknown, but pro-business stance makes nego-tiation most plausible
Australian Motoring Enthusiasts Party 1 Yes unknown, but memorandum with PuP could quicken negotiations
Australian Sports Party 1 Yes unknown
democratic labour Party 1 Yes unknown
Family First 1 Yes unknown
liberal democratic Party 1 Yes unknown
nick xenophon 1 unknown unknown
Source: BMI
power-related emissions on the DeclineMegatonnes Of Carbon Dioxide Equivalent
Source: BMI, Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education
minority parties, we believe they will have little choice. Thus
we see potential for an extended period of discussion before any
amendment and successful legislation is passed. Indeed, among
the cross-benchers, the PUP's pro-business policy slant makes
it one of the most plausible supporters of the government's
proposed plans to ease the cost of emissions on businesses.
potential For policy Vacuum to emergeGiven the extensive time needed for possible amendments and
negotiations, we believe that the Direct Action policy will not
be submitted during the parliament's first sitting in July, which
was the coalition government's original target date. That said,
we expect the repeal of the Clean Energy Act will still go ahead
which opens the possibility that a policy vacuum could emerge.
We believe that the lack of progress on other policy fronts (e.g.
paid-parental leave) and Prime Minister Tony Abbott's eager-
ness to repeal the bill (in a bid to reduce costs on businesses)
increases the risks of such a scenario occurring.
Given the potential changes in the Direct Action policy and the
growing risks of a policy vacuum, we expect power producers
(especially players in renewable energy) and large industrial
users to be unwilling to embark on large-scale investments over
the next few quarters. As such, until the government presents
a clear policy stance for carbon emissions and climate change,
we believe that private sector interest in investment for clean
energy in Australia will remain tepid at best.
Long-term political outlook
three Key challenges: population, climate change, china
BMi VieWThe Australian political scene is expected to remain stable over the
coming decade, although it will still face a number of key challenges.
The most salient are managing population growth, climate change and
relations with China.
As a Western liberal democracy with a long history of political
stability, Australia ranks comfortably in the top decile in BMI's
long-term political risk ratings, with an impressive score of 83.0 out
of 100. This reflects Australia's democratic system of government
(which guarantees free and fair elections), stable society and broad
policy continuity. That said, we highlight several key challenges
facing Australian leaders in the coming decade and beyond.
Managing Population Growth: The Australian Bureau of
Statistics' series B forecast for population growth (which reflects
current trends in birth rates, life expectancy and migration) ex-
pects the population to rise from 21mn in mid-2007 to 35.5mn
by 2056 – an increase of 61%. Even series C, the lower case
scenario, envisages the population rising by 47% from 2007
levels to 30.5mn.
The high increase forecast (series A) sees a doubling of the
population to 42.5mn by 2056. Given this rapid increase, Aus-
tralia's government must begin planning for a bigger population,
especially since this will place greater pressure on resources at
a time when the authorities are committed to tackling climate
change with its ratification of the second phase of the Kyoto
Protocol. There is already considerable debate within Australia
about the desirability of a bigger population.
The Liberal-National coalition has proposed radical measures
in a discussion paper while they were still in opposition, in a
bid to encourage migration to the northern part of the country
and ease pressures on living spaces and infrastructure within
the established cities.
Official forecasts expect New South Wales and Victoria to
remain the most populated regions in 2026 with 55.3% of the
total population, down only slightly from 57.5% in mid-2007.
In New South Wales, smaller cities such as Newcastle and Wol-
longong will also expand. However, the fastest-growing states
are expected to be Queensland and Western Australia, with the
former overtaking Victoria to become Australia's second most
populous state by 2050. Overall, these population dynamics
mean that building the necessary infrastructure – roads, rail-
10 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
strong across the BoardLong Term Political Ratings & Components
*Highest score is 100; Source: BMI
0102030405060708090100
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ways, homes, schools and hospitals – will remain a key politi-
cal objective. With state finances under strain, it will also be
a long-term challenge for both state and federal governments
to work together to address the deficit in infrastructure should
population growth be as high as projected rates.
Immigration And Asylum Issues: The population debate is
closely tied to immigration and asylum issues. As a wealthy
country situated in a predominantly underdeveloped region,
immigration (especially illegal immigration) has been a thorny
issue for decades and, until the 1970s, the country promoted a
'White Australia' policy. Australia is now a very multicultural
society, with 24% of its population born outside the country.
However, the government is keen to ensure that new immigrants
consist of skilled workers. Its current immigration policy focuses
on meeting high-skilled jobs, including areas such as health,
engineering and mining. The policies also target a clamp down
on immigrants with student visas who remain in the country after
the completion of their course and drift into low-skilled work.
Recent political turmoil in South East Asia and the Pacific Is-
lands has revived the debate on asylum seekers. The 2009 saw
a wave of attacks on Indian students, demonstrating that racist
violence still rears its ugly head in Australia. These incidents
also threatened to strain ties with India. Another factor affecting
public perceptions of immigration is the unmasking of radical
Islamist terror plots in the 2000s, which has raised concerns
about immigration from Muslim countries. Indeed, we believe
Australia will remain a potential target for terrorists given its
close ties with the US.
As a pre-emptive step towards stemming the flow of illegal
immigrants to Australia, we expect the government to increase
efforts to stop the boats carrying these seekers at sea as well as
increasing reliance on external immigration facilities to pro-
cess asylum seekers, potentially sparking further international
criticism.
This is a step away from the controversial 'Pacific Solution',
under which the then Labor government compensated the poor
South Pacific island state of Nauru with AUD30mn (US$30mn)
as part of its to house refugees at an offshore detention centre.
That said, Prime Minister Tony Abbott's current policy has
been equally disliked by the Indonesian and Papua New Guinea
governments, who felt the current coalition government unilat-
erally decided on these action plans which would burden them
with these seekers.
Dealing With Climate Change: The environment and climate
change have become one of the most important national topics
and it has been featured in federal elections since the 1990s.
Australia is one of the biggest producers of carbon dioxide (a
potent greenhouse gas) on a per capita basis owing to its heavy
reliance on coal for electricity.
Following the failure of the 2009 Copenhagen Accord to push
forward any legally binding environmental reforms, Australia's
aspirations to become a world leader in environmental manage-
ment has hit a snag. The ruling Australian Labor Party (ALP) had
been trying to introduce a nationwide carbon market to cap and
trade limits on carbon emissions – formally known as the emis-
sions trading scheme (ETS) – but failed after the bill was struck
down twice in parliament under then prime minister Kevin Rudd.
The ETS also led to divisions within the opposition coalition,
which saw the dramatic removal of former opposition leader
Malcolm Turnbull in December 2009. Turnbull was replaced by
Tony Abbott, who proposed an alternative, taxpayer-supported
environmental fund to combat climate change: Direct Action.
In July 2012, under the new administration of the previous prime
minister Julia Gillard, a tax of AUD23/tonne was implemented
on each tonne of carbon under the Clean Energy bill, and will
transition into a full-fledged market-based system by 2015. This
bill was amended to cover a much smaller group of emitters
compared with the original bill envisioned by the then Prime
Minister Kevin Rudd in his earlier period in office.
After one year into the implementation and upon his return to the
prime minister post, Kevin Rudd has accelerated the transition
to a floating price mechanism (previously due only in 2015).
However, now with the coalition government in power, Prime
Minister Tony Abbott has clearly stated his aims to scrap the
policy by June 2014, before the new fiscal year and Senate
term starts. This would mean that he would require the aid
of the opposition Labor Party's support in order to roll-back
the tax. While uncertainties do remain, we believe the recent
leadership change within the opposition ALP bode positively
for the coalition's goals.
Maintaining Cordial Relations With China: Australia's rela-
tionship with China has become increasingly important in recent
years, owing to China's emergence as Australia's biggest export
destination (having overtaken Japan). Australia has traditionally
been a very close ally of the US, but Australia must increasingly
tread a fine line between fostering closer economic cooperation
with China, while guarding against its rising military power.
11Business Monitor International Ltd www.businessmonitor.com
political outlook
The increasing amount of foreign direct inflows from China
makes this balance even more precarious as Australia remains
in need of foreign inflows to finance its large savings deficit.
At the same time, the Australian government has made efforts to
increase regional military cooperation – potentially as a hedge
against China – by signing a security pact with Japan. In light
of Australia's long-standing security ties with the US, some
Chinese strategic planners may interpret three-way defence
cooperation between Australia, Japan and the US as aimed at
curbing China. Increasing number of US troops on Australian
soil have also been downplayed but could increasing irk Aus-
tralia's largest export partner.
Nonetheless, we believes the Australian government will main-
tain a careful balance between wooing China as a trading and
investment partner and retaining close defence cooperation with
the US and Japan. With more than 30% of its exports generated
by Chinese demand, Australia cannot afford to antagonise China
and we thus believe that preserving cordial Australia-China
relations will continue to receive broad bipartisan support in
the foreseeable future.
12 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
13Business Monitor International Ltd www.businessmonitor.com
sWot analysis
strengths A free-market economy supported by a highly educated workforce.
Blessed with rich natural resources, Australia’s economic activity
has been augmented by demand for commodity exports and the
investments made in the mining sector.
Weaknesses The persistent current account deficit increases vulnerability to capital
flows and, by extension, currency volatility.
The export basket is highly concentrated in commodities, and
consequently exposes the economy and currency to fluctuations in
world prices for metals, coal and agricultural goods.
opportunities The rapid expansion of Asian economies in recent years offers new
opportunities for diversifying trading ties from core European markets.
A low level of government debt has provided a certain amount of
flexibility in fiscal policy to support domestic demand through the
downturn.
threats The high level of private sector debt – especially mortgage loans
– fuelled by overseas funding poses a threat to sustained growth.
A collapse in exports from a drop in resource demand from China
and other resource-hungry countries would severely impact headline
GdP growth.
Australia is vulnerable to extreme weather that may lead to droughts
and floods, which have become increasingly severe in past years
as a result of global climate change.
BMi economic risk ratingsOur short-term economic risk rating for Australia’s is 71.0, lower than its
long-term rating of 75.0 as we continue to expect the country’s growth
to slow in 2014 given the ongoing structural changes. We continue to
expect both the government and Reserve Bank of Australia to deliver
more stimuli to support the economy should signs of weakness. That
said, we do expect the economy eventually embark on the road to
recovery, as the economy rebalances away from the mining sector and
over-investment into housing. On the whole, these figures remain above
the regional average as the country still has solid long-term growth
prospects and sound economic policies.
Chapter 2: economic outlook
s-t economy rank trendnorway 79.6 1 +sweden 76.5 2 +Switzerland 76.2 3 +United States 75.2 4 +canada 74.6 5 +Germany 73.3 6 +New Zealand 72.3 7 +australia 71.0 8 -Austria 71.0 8 +denmark 70.0 10 +Netherlands 69.6 11 +united kingdom 69.2 12 +Belgium 67.7 13 -finland 67.3 14 +Japan 66.5 15 +france 66.2 16 +italy 64.8 17 +ireland 61.7 18 +iceland 61.7 19 -spain 59.8 20 +Cyprus 57.7 21 +Portugal 53.3 22 +Greece 40.8 23 +Regional ave 67.7 / Global ave 54.5 / Emerging Markets ave 52.6
L-t economy rank trendSwitzerland 81.8 1 =norway 80.0 2 =sweden 79.3 3 =denmark 75.4 4 =australia 75.0 5 =Austria 74.6 6 =Germany 74.6 7 =france 74.5 8 =United States 74.1 9 =Netherlands 73.5 10 =New Zealand 72.9 11 =united kingdom 72.2 12 =canada 71.8 13 =italy 70.2 14 =finland 69.7 15 =Japan 69.5 16 =Belgium 68.8 17 =spain 64.0 18 =ireland 63.5 19 =Cyprus 58.9 20 =Portugal 57.9 21 =iceland 57.2 22 =Greece 48.2 23 =Regional ave 70.4 / Global ave 53.5 / Emerging Markets ave 51.1
economic activity
Weak Job Market print suggests Further slowdown ahead
BMi VieWThe greater-than-expected job loss print recorded in December 2013
is in line with our outlook for Australia's unemployment rate to head
higher in 2014. The weak job report has fuelled increased expectations
for the Reserve Bank of Australia to cut rates further which, in turn,
has weighed on the Australian dollar. While the weaker currency is
likely to provide some breathing room for businesses, we believe that
these factors will prove to be no panacea, and we maintain our outlook
for real GDP growth to weaken to 2.0% in 2014, versus an estimated
2.4% in 2013.
In line with our downbeat expectations for the Australian labour
market, the December report showed that the economy lost more
full-time positions than the addition of part-time ones. While
workers leaving the job market (or simply given up looking
for a job) helped keep the overall unemployment rate steady
at 5.8% at the end of 2013, we believe that further job losses
in the months ahead will outweigh the impact from this trend,
and force the overall unemployment rate to head towards our
end-2014 forecast of 6.5%.
Monetary easing can only Do so MuchOn the back of this weak job market report, many market
participants are now cheering for further rate cuts from the
Reserve Bank of Australia (RBA), expecting that these interest
rate cuts could help revive economic activity. We, however,
hold a less optimistic outlook on the benefits that monetary
easing can bring.
To be sure, we expect the central bank to heed softening eco-
nomic indicators and add another 50 basis points (bps) to the
225bps worth of cuts that they have delivered over the past 18
months. These cuts have supported growing investor interest
in the Australian housing market that has help pushed up house
prices, which, in turn, has propped up the balance sheets of many
households. However, this increase in household wealth is not
14 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: econoMic actiVitY 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
nominal GdP, audbn [1,3] 1,254.6 1,356.0 1,444.6 1,488.3 1,561.8 1,630.4 1,706.7 1,798.0 1,901.9 2,011.4
nominal GdP, us$bn [1,3] 980.0 1,244.8 1,491.1 1,541.3 1,538.5 1,379.3 1,365.3 1,375.5 1,426.5 1,508.5
real GdP growth, % y-o-y [2,3] 1.1 2.9 2.2 3.7 2.4 2.0 2.5 2.8 3.0 3.0
GdP per capita, us$ [1,3] 44,872 56,895 66,786 66,074 63,244 59,981 58,801 58,670 60,252 63,111
Population, mn [4] 22.0 22.4 22.7 23.1 23.3 23.6 23.9 24.2 24.5 24.8
Industrial production, % y-o-y, ave [3] -0.8 4.7 1.2 4.6 2.9 1.2 1.6 2.1 2.0 2.0
Unemployment, % of labour force, eop [3] 5.5 4.9 5.2 5.4 5.8 6.5 6.1 5.7 5.5 5.5
Notes: e BMI estimates. f BMI forecasts. 1 Calendar Years; 2 Calendar Years, Base Year = FY2008/09 (July-June). Sources: 3 ABS/BMI calculation; 4 World Bank/UN/BMI.
current stability Driven By unsustainable FactorsSeasonally-Adjusted Unemployment Rate & Labour Participation
Rate (RHS), %
Source: BMI, Australia Bureau of Statistics
Little room For optimismNew Orders Sub-Index For Manufacturing And Services
*A level about 50 indicates expansion, Source: BMI, Australian Industry Group
sustainable, especially given the lack of fundamental factors
to support house prices at current levels (except for the low
interest rate environment).
Indeed, with activity and new order levels in the manufactur-
ing and services sectors remaining in contractionary territory
according to the Australian Industry Group's performance in-
dices, we see little reason for house prices to head higher over
the coming months. As such, we maintain our outlook for the
RBA's monetary easing to provide little support to economic
growth, and expect real GDP growth to slow further to 2.0%
in 2014 from an already-downcast forecast of 2.4% in 2013.
Weaker auD to provide some reprieveThat said, the increased expectations for further rate cuts have
also reduced demand for Australian assets. We see room for the
weaker AUD to provide some reprieve to exporters, even while
the general economic outlook remains quite weak. Indeed, the
weaker AUD could be especially helpful to the mining industry,
as miners often sell their products in US dollars.
Although we believe currency depreciation will prove to be no
panacea for the high-costs environment in Australia, the declines
will allow businesses some breathing space (and time) while
reforms are being negotiated and capital redeployed away from
the mining sector and into other productive industries. That
said, we caution that should the government fail to enact the
urgent structural reforms that the economy needs, the Australian
economy could be set to experience a longer period of adjustment.
Private Consumption Growth: With the job market weak-
ness finally showing up in the headline unemployment rate, we
believe that private consumption growth will show significant
weakness in 2014. Indeed, the soft job market will weigh on
wage growth, and together with high levels of household debt
of 94.4% of GDP as of end-2013, suggest that households could
begin deleveraging.
While we project the growth of private consumption to slow to
1.3% in 2014, from an estimated 1.5% in 2013, we highlight that
there is a possibility that should the global environment weaken
significantly, we see the risks of even greater job cuts, which
could lead to an overall contraction in private consumption.
Government Consumption: The Liberal-National coalition
government, elected in September 2013, has promised that it
will re-evaluate government spending through its commissioned
audit. This is on top of the other cuts (such as to the foreign
aid budget) that it has already delivered earlier in December
2013. Despite this, the government is keen to go ahead with
its new Direct Action plans and paid-parental leave, both of
which are likely to increase fiscal expenditures. As such, we
believe that public consumption growth will grow by 2.0% in
2014, and expect any little improvement in the fiscal balance
to be far smaller than government projections.
Gross Capital Formation: With many mining projects reaching
the end of their investment phrase, as well as increasing down-
side risks to a number of Australia's key mineral and energy
exports, we expect overall investment growth to slow. Indeed,
the value of private sector commercial infrastructure remains
higher than new housing projects and public infrastructure
projects put together.
Although we expect the governments, both at the state and
federal levels, to face increasing pressures to ease regulations in
order to stoke private sector investment once again, we expect
political and citizen opposition to slow the pace of these reforms.
Net Exports: On the back of our expectation for domestic
demand to weaken, we forecast the pace of growth for net
exports to accelerate in 2014. Indeed, we believe that import
growth will remain weak, projecting it to come in at a pace of
2.7% compared to the 10-year average of 8.8%. On the flipside,
we believe that the depreciating Australian dollar will help
provide some upside to the exports in both goods and services,
and thus, forecast export growth to rise to 4.5% in 2014 versus
2.3% in 2013.
Fiscal policy
Weaker Federal Finances to intensify pressure on states
BMi VieWThe lack of fiscal expenditure reforms in Australia continues to support
our downbeat outlook for public finances. With fiscal revenues likely to
disappoint given the weakening economic outlook and little room for
the government to boost revenues with higher tax rates, we expect the
fiscal deficit to widen further over the next two fiscal years. With the
federal government less able and willing to aid state governments, the
latter has increasingly being pressed to turn to other means of financ-
ing such as the sale of state assets, and we believe these pressures
will intensify as economic performance disappoints.
15Business Monitor International Ltd www.businessmonitor.com
economic outlook
The Australian government's mid-year fiscal outlook confirms
our view that the public sector remains entrenched in its spending
habits even as tax revenue growth is likely to slow significantly
(and possibly contract).
Its revised projections now show the federal government's fiscal
deficit widening to AUD38.1bn (2.4% of GDP) for fiscal year
2013/14 (July-June), which would represent an increase of more
than 50% from the deficit recorded the same period a year ago
(AUD23.0bn or 1.5% of GDP).
While the impact of a weakening economy on fiscal revenues
and the resulting deficit is fairly large, part of the problem also
lies in the government's inability to rein in spending. Indeed, the
anti-cyclical nature of certain policies such as unemployment
benefits, which may seem easy to finance in an environment
with strong economic growth, often exacerbate the deficit in a
downturn when revenues dry up. Despite the good intentions of
these policies, the government must raise taxes to finance the
rising cost of benefits (which are often indexed to inflation),
or scale them to ensure they are affordable, lest it finds itself
saddled with ever-increasing amounts of debt.
Lack of expenditure reforms Bodes ill For australia's Fiscal outlookWith tax rate hikes likely to prove counterproductive with the
economy slowing, expenditure reforms are ne eded more than
ever. Indeed, while Prime Minister Tony Abbott has shown re-
straint in refusing requests for equity infusions and subsidies by
the car industry (GM Holden) and the airline industry (Qantas),
only piecemeal steps have been taken to arrest the growth of
existing expenditures.
So far, cuts have only been made to fringe items such as
conservation budgets (a cut of AUD6.7mn) and legal aid for
indigenous people (a cut of AUD43mn). Furthermore, the lack
of a majority in the Senate could prevent the government from
implementing any drastic changes proposed by the Commis-
sion of Audit, which has been tasked to reduce spending. It is,
thus, unsurprising that the government's fiscal projections rely
largely on revenue growth, rather than expenditure cutbacks, to
reach a balanced budget, similar to the governments that have
gone before. Given the low likelihood of a fundamental shift in
fiscal policy, we believe that the fiscal deficit will widen further
in FY2014/15 to AUD47.8bn (2.9% of GDP), compared to the
government's forecast for it to narrow to AUD29.9bn (1.8%
of GDP).
states pressured to turn to other Funding MeansGiven the deteriorating outlook for federal government finances,
it is unsurprising that federal authorities have been keen for state
governments to shoulder an increasing proportion of capital
expenditures as well as the costs of any state-directed economic
policy (such as the fund set up by South Australia and Victoria
to offset the departure of the two car makers, Holden and Ford).
16 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: FiscaL poLicY 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
Fiscal revenue, AUDbn [2] 295.3 323.8 350.3 364.0 376.8 395.3 417.7 439.6 459.3
Revenue, % of GDP [2] 21.8 22.4 23.5 23.3 23.1 23.2 23.2 23.1 22.8
Fiscal expenditure, AUDbn [2] 353.4 361.0 382.7 396.6 421.7 441.7 461.6 480.0 495.6
Expenditure, % of GDP [2] 26.1 25.0 25.7 25.4 25.9 25.9 25.7 25.2 24.6
Budget balance, audbn [2] -58.1 -37.2 -32.4 -32.5 -44.9 -46.4 -43.9 -40.5 -36.3
Budget balance, % of GDP [2] -4.3 -2.6 -2.2 -2.1 -2.8 -2.7 -2.4 -2.1 -1.8
Primary balance audbn [1,2] -50.2 -26.6 -20.7 -18.2 -30.5 -31.6 -28.2 -23.8 -19.3
Primary balance % of GDP [1,2] -3.7 -1.8 -1.4 -1.2 -1.9 -1.9 -1.6 -1.3 -1.0
Notes: e BMI estimates. f BMI forecasts. 1 Fiscal balance stripping out interest payments on government debt. Sources: 2 ABS/BMI calculation, adjusted to calendar-year basis.
can abbott rein in spending? Fiscal Revenues & Expenditures, % chg y-o-y
Source: BMI, The Commonwealth of Australia
However, most states are facing similarly poor fiscal outlooks,
and their lower credit ratings make it more costly for them to
finance spending through greater debt issuance.
As such, a number of states are increasingly pressed to seek
alternative funding measures, whether it via public-private
partnerships to get projects moving, leasing out or even selling
public assets (see, 'Greater Private Sector Participation Not
Without Risks', January 6). We believe that these pressures,
alongside cost cutting drives, are likely to intensify over the
quarters, especially in the states of Victoria, Queensland,
and New South Wales, which are likely to experience a stark
slowdown as activity levels in the manufacturing and mining
sectors weaken.
Monetary policy
economic Deterioration to reignite rBa's easing Bias in H214
BMi VieWWe maintain that the Reserve Bank of Australia (RBA) will return to
its easing bias in H214 despite having held its key policy rate at an
all-time low of 2.50% in its February 4 meeting. With profit margin and
supply-side cost pressures still intensifying, we believe that spending
cuts from mining, manufacturing and services sectors are unlikely to
abate. Moreover, we maintain that rising construction in the housing
sector will prove insufficient to avert an economic slowdown. As such,
we maintain that the RBA will cut the cash rate by 50 basis points to
2.00% by end-2014.
In line with our expectations, the Reserve Bank of Australia
(RBA) decided to keep its policy rate at the current all-time
low level of 2.50% in its monetary policy meeting on Febru-
ary 4. However, we do not believe this is the end of the central
bank's rate cutting cycle, and see room for the RBA to deliver
another two rate cuts of 25 basis points (bps), bringing the cash
rate down to 2.00% by end-2014.
Driving our interest rate view is our downbeat outlook for the
wider economy, and this is driven three main factors: further
project delays that will likely weigh on the mining sector,
manufacturing and services firms continue to face weak profit
margins, and our view that overall construction activity will
continue to contract despite the upward trajectory in house
prices. Moreover, rather than signalling a shift from its easing
bias, we believe that the recent decision to keep interest rates
17Business Monitor International Ltd www.businessmonitor.com
economic outlook
taBLe: MonetarY poLicY 2010 2011 2012 2013e 2014f 2015 f 2016f 2017f 2018f
Consumer price inflation, % y-o-y, eop [2] 2.7 3.1 2.2 2.7 1.9 2.3 2.7 2.7 2.7
Consumer price inflation, % y-o-y, ave [2] 2.8 3.4 1.7 2.4 2.3 2.1 2.5 2.7 2.7
Producer price inflation, % y-o-y, eop [2] 2.7 2.9 1.0 1.9 1.2 2.0 2.3 2.2 2.2
Producer price inflation, % y-o-y, ave [2] 1.4 3.0 1.2 1.6 1.5 1.6 2.2 2.3 2.2
M1, audbn [2] 262.6 263.2 271.6 297.8 309.2 320.6 336.3 354.8 374.3
M1, % y-o-y [2] 8.5 0.2 3.2 9.7 3.8 3.7 4.9 5.5 5.5
central Bank policy rate, % eop [2] 4.75 4.25 3.00 2.50 2.00 2.00 2.25 2.50 2.75
lending rate, %, ave [3] 8.4 8.2 6.8 6.2 5.7 5.7 5.9 6.2 6.4
real lending rate, %, eop [1,4] 5.8 5.1 4.6 3.5 3.8 3.4 3.2 3.5 3.7
real lending rate, %, ave [1,4] 5.6 4.8 5.1 3.7 3.4 3.6 3.4 3.5 3.7
3-month money market rate, % eop [5] 5.0 4.5 3.1 2.6 - - - - -
real 3-month money market rate, %, eop [1,5] 2.3 1.4 0.9 -0.1 - - - - -
3-month money market rate, %, ave [5] 4.7 4.5 3.1 2.6 - - - - -
real 3-month money market rate, %, ave [1,5] 1.8 1.1 1.4 0.2 - - - - -
Notes: f BMI forecasts. 1 Real rate strips out the effects of inflation. Sources: 2 RBA/BMI calculation; 3 IMF; 4 IMF/BMI; 5 BMI.
tough conditions persistRatio Of Selling To Input Prices For Manufacturing (TOP)
Source: Australian Industry Group, BMI
unchanged reflects the central bank's cautious outlook as well as
a pending assessment on whether recent currency weakness will
translate into growth for the non-mining sectors of the economy.
project Delays threaten Mining sectorFor one, the mining sector, mainly driven by oil and gas projects,
is facing growing downside risks as a combination of project
cancellation, higher costs and reduced pricing power are weigh-
ing on the outlook.
A declining appetite for coal projects is already weighing on
the sector, but project cost escalations have been on the rise,
threatening their feasibility (especially in the case of liquefied
natural gas projects [LNG]). One example is the ongoing review
of Royal Dutch Shell's Gladstone LNG project, which has
also reportedly cut its workforce given rising prospects that the
project could be delayed. Moreover, with end-product prices
facing downside risks, we believe the sector's performance
could deteriorate further.
Pressures On Profit Margins To Push unemployment rate HigherSecondly, we have an equally downbeat outlook for the broader
economy given that both manufacturing and services sectors
continue to report pressures on their profit margins, which we
expect will lead to slower growth and a weaker employment
outlook.
Indeed, the 12-month moving average of the ratio of selling to
input prices (from the Australian Industry Group's sector perfor-
mance sub-indices) for the manufacturing and services sectors
are both close to their all-time lows. Given that businesses have
been engaged in cost cutting over the past year, we believe that
much of the low-hanging fruit has already been reaped and, thus,
see greater job losses in the pipeline. So far, the unemployment
rate has increased to 5.8% in December 2013, from 5.4% in
January. We believe it could rise much more quickly to 6.5%
by end-2014, a level not been seen since June 2002.
Meanwhile, the Liberal-National coalition government's deci-
sion to halt all subsidies to various struggling companies (such
as Ford, and most recently, SPC-Ardmona, a food packing
business) will inevitably lead to short-term job losses and weigh
on domestic demand (although we believe this is positive for
long-term growth). With the coalition government unable to
deliver the necessary labour reforms to quicken the adjustments
in the job market (mainly due to the lack of sufficient seats in
the Senate to push through reforms), we believe that the central
18 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
Housing Loans Main Driver of credit GrowthVarious Credit Segments (pp contribution) & Total Private Credit (%
chg y-o-y)
Source: RBA, BMI
preference For Fixed rates 0X3 Months & 9X12 Months AUD Forward Rate Agreement (%)
Source: Bloomberg, BMI
tough conditions persist Services Sectors And Their 12-mma
Source: Australian Industry Group, BMI
bank will resume its easing cycle in order to offset the weakness
in the economy.
rising House prices and construction activity no panaceaWe believe that overall construction activity growth is likely to
slow further, despite growth from the housing sector and this
will add further impetus for monetary easing (see, 'Construction
Unlikely To Suffice As Support For Growth', August 15 2013).
Together with our lacklustre outlook for wages and jobs, fur-
ther increases in house prices are unlikely to prove sustainable.
Hence, we believe that the housing sector will fail to prevent a
further slowdown in Australia.
Macro-prudential rules Will provide scope For rBa to cut ratesWe see potential for the RBA to enact macro-prudential rules,
in order to balance the pressures of an over-heating housing
market, with a weakening economy. To this end, the RBA
could mirror the policy undertaken earlier in New Zealand by
the Reserve Bank of New Zealand (RBNZ), where the central
bank increased the amount of capital that financial institutions
had to hold against more highly-leveraged mortgages. Such a
policy would then allow the RBA to cut interest rates to support
the broader economy without simulating house prices further.
Value in receiving Fixed ratesGiven our view for the RBA to cut interest rates by another
50bps, we note that the current yield on the AUD forward rate
agreements (FRA) could provide an attractive entry point as we
expect the market to converge with our view over the coming
months. Indeed, with the 9 month x 12 month agreement is pric-
ing in a small chance of a rate hike, trading at 18 basis points
above the 0 month x 3 month agreement, we believe there is
value in a 'received fixed, pay floating' view.
Balance of payments
Trade Positives Insufficient To Support auD in 2014
BMi VieWReductions in capital imports by businesses in Australia have been a
key driver underpinning the narrowing of the trade deficit, which came
in at AUD118mn in November in seasonally-adjusted terms. With the
employment picture showing signs of deterioration, we believe that
subdued household demand will lead to further imports contractions
and, thus, expect the trade deficit to narrow further into balance in
2014. Although these improvements should reduce depreciatory pres-
sure on the AUD from the trade account, we believe that lower returns
on Australian assets, as well as improving conditions elsewhere, will
outweigh those pressures and drive the AUD to average US$0.8460/
AUD in 2014.
Faltering business sentiment in Australia has become more
apparent in November's trade figures, as the contraction in
demand for imported capital intensified to decline by 13.0%
year-on-year (y-o-y), doubling the pace of decline recorded
in October. On a 12-month-moving-sum basis, demand for
imported capital goods fell by 8.7% y-o-y, the fastest pace
since April 2010.
19Business Monitor International Ltd www.businessmonitor.com
economic outlook
preference For Fixed rates Spread, bps
Source: Bloomberg, BMI
consumer Demand contraction on the Way? Imported Consumption, Capital & Intermediate Goods, 12-mms %
chg y-o-y
Source: BMI, Australian Bureau of Statistics
Together with the improvements in merchandise exports,
Australia's goods surplus expanded to an eight-month-high of
AUD670mn in November in seasonally-adjusted terms. The goods
surplus helped offset a large proportion of the services deficit,
which came in at AUD788mn in November, narrowing the overall
trade deficit to AUD118mn. With the December readings of the
Australian Industry Group's (AIG) performance indices for manu-
facturing and services falling deeper into contractionary territory,
we believe further declines for imported goods are on the cards.
Indeed, Australia's external accounts look on track to match our
trade deficit projections for 2013 and 2014, which we forecasted
to come in 0.7% and 0.0% of GDP respectively.
consumer Demand For imports next in Line to FallWhile declining demand for imported capital goods has been the
main driver of trade improvements in 2013, we believe that a
pullback in consumer spending will help support further import
contraction in 2014. Demand for imported consumer goods has
begun to show signs of losing steam, with growth slowing down
to 5.2% y-o-y in November, versus an average pace of 6.8%
over the previous 12 months.
While growth for this segment could remain in positive terri-
tory over the next few months, we maintain that deteriorating
prospects for jobs and wage growth will reduce households'
willingness to spend, and curtail demand for imported con-
sumption goods. Indeed, we have witnessed a decline in hiring
intentions, as evidenced by accelerating contraction recorded by
the employment sub-indices of the AIG performance indices.
Given our duller outlook for the consumer spending we expect
that demand for imported services will likewise contract in
20 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: current account 2010 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
Goods imports, US$bn [2] 218.4 240.2 264.0 229.9 218.5 220.2 223.1 233.8 246.0
Goods imports, % of GDP [2] 17.5 16.1 17.1 15.3 15.8 16.1 16.2 16.4 16.3
Goods exports, US$bn [2] 237.8 268.4 258.9 229.2 225.7 233.0 239.2 261.0 279.3
Goods exports, % of GDP [2] 19.1 18.0 16.8 15.2 16.4 17.1 17.4 18.3 18.5
Goods exports, % of imports [2] 108.9 111.7 98.1 99.7 103.3 105.8 107.2 111.6 113.5
Balance of trade in goods, US$bn [2] 19.4 28.2 -5.1 -0.7 7.2 12.8 16.1 27.2 33.3
Balance of trade in goods, % of GDP [2] 1.6 1.9 -0.3 -0.0 0.5 0.9 1.2 1.9 2.2
Services imports, US$bn [2] 57.1 60.3 64.6 56.6 51.5 50.4 50.0 51.5 53.0
Services imports, % of GDP [2] 4.6 4.0 4.2 3.8 3.7 3.7 3.6 3.6 3.5
Services exports, US$bn [2] 52.3 51.3 52.9 46.7 43.8 42.9 42.7 44.2 45.6
Services exports, % of GDP [2] 4.2 3.4 3.4 3.1 3.2 3.1 3.1 3.1 3.0
Goods and services exports, US$bn [2] 290.1 319.7 311.7 275.9 269.5 275.9 281.9 305.2 324.9
Goods and services exports, % of GDP [2] 23.3 21.4 20.2 18.3 19.5 20.2 20.5 21.4 21.5
Balance of trade in goods and services, US$bn [2] 14.7 19.2 -16.9 -10.5 -0.5 5.3 8.9 19.9 25.9
Balance of trade in goods and services, % of GDP [2] 1.2 1.3 -1.1 -0.7 -0.0 0.4 0.6 1.4 1.7
income account balance, us$bn [2] -54.4 -51.1 -38.8 -30.8 -26.7 -22.6 -19.2 -16.9 -15.1
Income account balance, % of GDP [2] -4.4 -3.4 -2.5 -2.0 -1.9 -1.7 -1.4 -1.2 -1.0
Net transfers, US$bn [2] -1.5 -1.5 -1.4 -1.4 -1.5 -1.6 -1.7 -1.8 -2.0
Net transfers, % of GDP [2] -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
current account balance, us$bn [2] -41.3 -33.5 -57.1 -42.7 -28.7 -18.9 -12.0 1.2 8.8
Current account balance, % of GDP [2] -3.3 -2.2 -3.7 -2.8 -2.1 -1.4 -0.9 0.1 0.6
Openness to international trade, % [1,2] 36.6 34.1 33.9 30.5 32.2 33.2 33.6 34.7 34.8
Notes: f BMI forecasts. 1 Imports plus exports, % of GDP. Sources: 2 ABS/BMI.
trade Balance in 2014?Goods, Services & Overall Trade Balance, 12-mms (AUDbn)
Source: BMI, Australian Bureau of Statistics
2014, thus reducing the drag from the net services deficit on the
overall trade account. With travel expenditures accounting for
more than 40% of imported services, we expect the cutbacks
by Australian households to be evident in lower expenditures
on overseas holiday trips.
Depreciatory pressures on auD to prevailAlthough the Australian dollar has lost some ground in 2013,
we see room for further weakness as we believe that Australian
assets will be less appealing to international investors. Demand
from China has begun to show signs of cooling and with the
new government keen to move away from growth driven by
fixed asset investment, returns on mining assets in Australia
are likely to head lower in the quarters ahead.
Likewise, we believe the broader private sector will record
weaker profits this year, as further cost cutting for many Aus-
tralian businesses may prove difficult given the extensive cost
reduction exercises over the past quarters. The 50 basis points
(bps) worth of rate cuts that we expect the Reserve Bank of
Australia (RBA) to deliver by end-2014 will further narrow
the carry advantage that the AUD has over other currencies.
Juxtaposed against more attractive outlook for assets in recover-
ing markets such as the US and Europe, demand for Australian
assets and hence the currency is likely to decline. As such, while
the narrowing of the trade deficit in 2014 could present some
upside risks to our view for further weakness in the currency,
we believe that the declining return on assets in the country
will lead to a fall in demand for financial assets and investment.
Hence, we maintain our forecast for the currency to average
US$0.8460/AUD for the year, which implies a depreciation of
5.2% from end-2013 rate of US$0.8922/AUD.
21Business Monitor International Ltd www.businessmonitor.com
economic outlook
the australian economy to 2023
exports and immigration Key For Long-term Growth
BMi VieWAustralia's real GDP growth is expected to remain firm, averaging 2.8
% in the 10-year period from 2014 to 2023. In particular, we believe
commodity exports and a renewed interest in skilled immigration will
be key drivers in helping the economy return to its trendline growth of
around 3.0% from 2017 onwards, following a slowdown in 2012-2016.
While Australia's medium-term economic prospects are poor,
as we expect the start of major deleveraging cycle to undermine
consumption in the coming years, the longer-term outlook
remains bright, with expected real GDP growth heading back
towards trendline growth of around 3.0% from 2017. Indeed,
our core scenario assumes the economy will be able to recover
from a property crash and Chinese slowdown, as the country
rebalances towards relying more on domestic manufacturing
and exports rather than external debt as a key growth engine.
Indeed, we see Australians becoming more cautious spenders
following the aftermath of the property bust, as the expected
decline in their net worth owing to the fall in home values
should compel a shift towards savings and the lowering of
consumer debt.
We expect the government to maintain a relatively open im-
migration policy – especially for skilled areas that are facing
chronic shortages such as engineering and nursing – which will
be crucial for the expansion of the domestic economy.
private consumption to recoverThe outlook for private consumption in the second half of the
2010s is considerably better than what we forecast in the next
five years, given that the worst of the deleveraging is expected
to be over by 2014. In 2014-2015, we expect consumer confi-
dence and thus private consumption to be adversely affected by
falling property prices, as consumers may become reluctant to
spend owing to the loss of wealth caused by lower home values.
The average forecast private consumption growth in these two
years is 1.5%, considerably lower than the 3.5% mean achieved
in the 2000s.
23Business Monitor International Ltd www.businessmonitor.com
Chapter 3: 10-Year Forecast
taBLe: LonG-terM MacroeconoMic Forecasts 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f
nominal GdP, us$bn [1,3] 1,375.5 1,426.5 1,508.5 1,595.5 1,687.5 1,785.0 1,885.1 1,991.8
real GdP growth, % y-o-y [2,3] 2.8 3.0 3.0 3.0 3.0 3.0 2.8 2.9
Population, mn [4] 24.2 24.5 24.8 25.1 25.4 25.7 26.0 26.3
GdP per capita, us$ [1,3] 58,670.0 60,252.0 63,111.0 66,124.0 69,301.0 72,650.0 76,031.0 79,638.0
Consumer price inflation, % y-o-y, ave [5] 2.5 2.7 2.7 2.7 2.7 2.7 2.7 2.7
Current account balance, % of GDP [6] -0.9 0.1 0.6 0.9 1.1 1.4 1.6 1.5
exchange rate aud/us$, ave [7] 1.31 1.33 1.33 1.33 1.33 1.33 1.33 1.33
Notes: f BMI forecasts. 1 Calendar Years; 2 Calendar Years, Base Year = FY2008/09 (July-June). Sources: 3 ABS/BMI calculation; 4 World Bank/UN/BMI; 5 RBA/BMI calculation; 6 ABS/BMI; 7 BMI.
The Benefit Of Open DoorsGlobal – Average Real GDP Growth Against Population Growth
from 1991 to 2009, %
Source: BMI
Nevertheless, we believe Australia will continue to maintain a
large consumer base – still making up close to 50.0% of GDP in
2023 – as the country emerges from economically tumultuous
times in the early 2010s.
Indeed, several long-term tax reforms are poised to help ensure
that Australia's private consumption growth will recover in the
second half of the coming decade. These include the proposed
three-percentage-point (pp) rise in employers' contribution to
the superannuation (defined contribution) fund to 12% by 2019
(from 9% currently), which will take place in phases from 2013
onwards. Such tax changes should help increase the average
Australian's spending power even as the population ages, bol-
stering private consumption upwards to average 2.0% for the
period between 2016 and 2020.
However, there are growing risks to our current long-term
forecasts as the newly-elected Liberal-National coalition
looks to review the tax system which could include changes
to the current superannuation system. This could dampen the
willingness of Australians save more under such schemes,
and the lower savings could mean lower future consumption
as the population greys.
private sector to aid Fiscal improvementsWe maintain our bearish outlook on the country's medium-
term fiscal situation despite a change in government, and have
pushed back our primary balance forecasts for it to only return
to balance in FY2021/22. Supporting this is the fact that the
new coalition government has proposed significant spending
and investment plans while plans for cuts and savings have
fallen short. That said, the government is increasingly looking
towards the private sector and asset sales to help fund infra-
structure, which will relieve some pressure off fiscal accounts.
This is consistent with our expectation for a recovery in private
consumption during that period, where Australian corporations
and consumers power the economy while Canberra reduces
its fiscal deficit.
external rebalancingAustralia's external sector is expected to experience a shift away
from a reliance on financial account inflows towards export earn-
ings, lowering primary income outflows (interest and dividends
paid to foreigners) in the process. The rebalancing process is
expected to boost export growth, allowing it to outpace import
growth from 2015 onwards. As a result, we are forecasting the
current account deficit to shrink considerably in the near term
and flip into a surplus over the next 10 years.
In particular, we are expecting a reversal of 'Dutch Disease'
following a slowdown in resource demand from China, as
Chinese infrastructure growth should moderate given the over-
investment in the late 2000s. This will have a positive effect
on outbound shipments of manufactured goods, thanks to the
expected decline in the Australian dollar to US$0.75/AUD by
end-2016 (from US$0.8946/AUD at the point of writing) as a
result of relatively lower mining activity.
Moreover, the gradual taper in investment and activity from the
mining sector is likely to cool demand for the currency. As a
result of the mining boom over the past few years, the Austral-
ian dollar has almost 80% between 2000 and 2012, causing
the manufacturing industry's share of GDP to shrink to almost
7.0% from 10.5%. The gap left by lower resource exports will
likely be filled by manufacturing exports thanks to better price
competitiveness as the currency depreciates and upward pres-
sures on wages diminish, allowing manufacturers to expand
over the next decade.
immigration still necessary For sustainable GrowthAlongside the Liberal-National coalition's harsher policy against
illegal immigrants, it has also pledged to put national interest
first when reviewing the country's immigration policy. That
said, we remain sceptical of the government's commitment
to a stricter immigration policy over the long term, given that
Australia still needs a healthy flow of skilled immigrants to help
augment economic growth. Our core view assumes an immigra-
24 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
BMi’s long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most
cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,
demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,
our forecasts also reflect analysts’ in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in
the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,
fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,
external account balances and interest rates.
tion policy that will be somewhat tighter than the boom years
of the 2000s, enabling population growth to average 1.2% in
2012-2020, from 1.5% in 2001-2010.
the case For Becoming 'Big': a Global comparisonHistorical data from 1991 to 2009 showed that population
growth correlated very well with real GDP growth, particularly
in advanced economies. Based on a simple linear regression of
data from 10 representative nations – all of which were already
very well developed in the early 1990s – the numbers suggest
that a 1.0pp increase in long-run average population growth
would lead to a 2.0pp rise in long-run average real GDP growth.
The adjusted R-square of the equation is 0.94, representing a
very good fit.
At the extremes, Singapore and Japan ranked as the best and
worst performers respectively. Indeed, Singapore's 'open door'
policy over the past 20 years has seen its population increase
from 3.0mn in 1990 to 5.0mn today – a staggering 66.7% rise.
This helped provide the labour needed for the economy to ex-
pand at an average rate of 6.2% per annum, significantly higher
than the average of its developed peers. By contrast, Japan's
homogeneous society, which generally discouraged immigra-
tion, helped contribute to sluggish economic expansion of only
0.8% per annum.
Growing With Better infrastructureCanberra generally maintained a pro-immigration policy, with
net migration making up 43.7% of total quarterly population
growth since 1991. With a steady inflow of foreigners, real GDP
managed to grow by 3.4% per annum from 1991 to 2010. Inter-
estingly, net migration actually intensified alongside the mining
boom from 2006 to 2009, comprising a whopping 60.4% of total
population growth on average during that period.
Therefore, we believe Australia cannot afford to prematurely
restrict immigration policies, but will instead opt to improve
infrastructure. Indeed, we remain relatively bullish about the
Australian infrastructure sector's outlook in the medium term.
We expect the growth in gross capital investment to outperform
the general economy once Australia recovers from the recession.
This is because we expect the Australian government to remain
committed in addressing infrastructure deficits across the country.
25Business Monitor International Ltd www.businessmonitor.com
10-YEAR foREcAst
27Business Monitor International Ltd www.businessmonitor.com
sWot analysis
strengths A highly educated workforce and comparatively modern transport
infrastructure underpin economic prospects.
A number of free trade agreements with countries such as New
Zealand, Thailand and the US serve as a boon for trading activities.
Weaknesses Despite its openness, Australia requires the Foreign Investment
Review Board to approve any commercial real estate investment
by a foreign company or individual valued at US$5mn or more.
With a population of just over 23mn, the domestic consumer base
is small by regional standards.
opportunities Australia is currently in talks with China, Malaysia, the Gulf Co-
operation Council, Indonesia, India, Japan and South Korea regarding
potential bilateral free trade agreements. It is also part of negotiations
for the Trans-Pacific Partnership and a regional south pacific pact,
PACER plus.
Upgrade and expansion of urban infrastructure will be needed to
sustain population growth in Australia’s main cities, providing oppor-
tunities for public-private partnerships in the future. The government
is also targeting infrastructure improvements to rural areas.
More healthcare infrastructure will be needed to support the ageing
population, and with the introduction of the federal government’s
National Disability Insurance Scheme, the industry is likely to see
increasing demand for services.
threats Corporate taxes for foreign investors in Australia remain higher than
in other countries, and it seems unlikely that the government will
succeed to reduce the rates in the near future.
Recent investment proposals by Chinese firms regarding the
agricultural and resource extraction sector have raised fears that
strategic assets will be lost to foreign players. This has led to more
conditions attached to the sale agreements, which is likely to reduce
the attractiveness of these assets. It remains to be seen if the recent
implementation of a database to increase transparency around
foreign-owned Australian assets will spur more regulation.
BMi Business environment risk ratingsAustralia’s high business environment rating of 78.0 is a result of its
strong national institutions and relatively good quality of infrastructure.
The country’s relative economic openness to foreign investment should
allow it to benefit from increased investment inflows from places such
as China and Japan, aiding it to develop the mining sectors and reaping
the benefits from increasing resource demand. That said, the ‘market
orientation’ subcomponent currently stands at 68.1, given that overall
tax rate, taking into account both corporate tax and other forms of tax
(e.g. the possible removal of superannuation tax cuts) is still relatively
high, which remains a key weakness for Australia.
Chapter 4: Business environment
Business environment rank trendaustralia 78.0 1 =denmark 77.7 2 =Switzerland 76.6 3 =ireland 76.3 4 =norway 76.0 5 =New Zealand 75.7 6 =United States 75.2 7 =canada 74.8 8 =sweden 74.8 9 =finland 74.7 10 =united kingdom 74.5 11 =Netherlands 72.2 12 =Germany 72.1 13 =Belgium 71.2 14 =france 69.4 15 =Austria 69.4 16 =Japan 67.8 17 =spain 66.4 18 =iceland 65.8 19 =Portugal 62.8 20 =italy 60.0 21 =Cyprus 59.5 22 =Greece 52.7 23 =Regional ave 71.1 / Global ave 48.3 / Emerging Markets ave 45.0
Business environment outlook
Trans Pacific Partnership: Conclusion to remain elusive in 2014
BMi VieWIn line with our expectations, the group of 12 negotiating countries
missed the 2013 deadline to reach a consensus on the draft outline
for the Trans-Pacific Partnership (TPP). We believe that negotiations
in 2014 are unlikely to fare any better as non-goods clauses remain
the key stumbling block. Apart from domestic opposition in various
countries, elections due at the end of 2014 for New Zealand and the
US are likely to reduce the amount of time available for negotiators.
We maintain our expectations for a much smaller pact to be conclud-
ed, and even then, believe that chances of a deal in 2014 are small.
The Trans-Pacific Partnership (TPP) talks held in Singapore
from December 7 to 9 ended with little fanfare. In line with
our expectations, the goal for an initial agreement failed to
materialize, undermining any last hopes regarding the ambitious
end-2013 deadline. Although US negotiators have maintained
an upbeat tone and South Korea has expressed interest to join
the 12-country agreement, we note that ASEAN members have
been relatively more downbeat on the progress of the talks.
This lack of unity was more clearly revealed to the wider public
when confidential draft documents (specifically the intellectual
property protection and investment chapters) were made public
by the Wikileaks group on November 13 and December 9 2013,
respectively.
non-Goods chapters to stall progressNon-merchandise trade related clauses (such as intellectual
property protection, investor-state dispute resolution clauses and
rules for government procurement processes) remain the main
stumbling block, and we believe these issues will ultimately
determine whether the TPP will come to a conclusion.
Even with the inclusion of Japan – which broadly adopts some
of these clauses in their bilateral economic pacts – there has
been little progress since we highlighted the concerns of various
nations previously (see 'TPP: Consensus Out Of Reach, 2013
Deadlines Unlikely ', August 29 2013). Indeed, we note that
countries like Malaysia and Vietnam, who coincidentally have
much higher restrictions on services trade according to the World
Bank, are growing increasingly cold towards the negotiations,
as these proposed rules are likely to radically change relations
between states and firms (foreign and local).
Although we believe that the potential benefits of greater trade
access will remain a draw for these two nations, the large dis-
tance between Malaysia, Vietnam, and their respective peers
in terms of restrictions in these areas (which we have reflected
in the chart above using restrictions to services) suggest that
a middle ground will be hard to find. While we expect the US
delegation to try to keep all parties at the table, the gap is wide
enough that Malaysia and Vietnam may choose to leave the
negotiating table altogether, although we believe there to be
only an outside chance of this occurring.
elections could Further narrow the Window of opportunityEven if the 12 negotiating countries find common ground, we
believe that the individual negotiating parties could face stiff
political resistance back home, which could stall any ratification.
The leaked documents have so far allowed TPP opponents to
better promote possible scenarios that would most likely turn
voters against the pact (i.e. pushing up healthcare costs).
Moreover, countries whose ruling parties in government could
change or are subject to coalition politics (such as Australia
and New Zealand) may face greater difficulties. In particular,
the US and New Zealand are due to hold elections close to
the end of 2014. As such, we believe that election pressures
are likely to escalate after Q314, especially in New Zealand
(a key supporter of the TPP), where the opposition Labour
and Green parties are broadly unsupportive of the pact. Given
that we expect political parties to refrain from entering into
any substantive agreements amid of the turmoil of election
28 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
Finding Middle Ground could Be impossibleAsia – Overall Services Trade Restrictions Index
Scale from 0 to 100, 0 being completely open, 50 indicates major restrictions and 100 being completely closed; Source: BMI, World Bank
campaigning, we believe that a much shorter window for
negotiations suggests that the final agreement is unlikely to
be reached within 2014.
Indeed, we maintain our initial expectation that many of the
rules will either have to be watered down, or have their ef-
ficacy reduced. Otherwise, we believe it is more likely for
the agreement to be ratified by a substantially smaller group
than the current 12 negotiating countries (Australia, Brunei,
Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru,
Singapore, Vietnam, and the US).
Business environment
introductionAustralia boasts of an open investment climate, strong legal
framework, firm protection of property rights and minimal cor-
ruption. However, its physical infrastructure is coming under
increasing strain, as congestions on roads, railways and at ports
suggest that the economy is constrained from reaching its full
economic potential.
In fact, the government itself acknowledged the need to address
these deficiencies, making infrastructure investment one of the
focal points of its fiscal policy over the past few budgets. A
second issue in Australia is a shortage of skilled labour, but
the government appears focused on modernising the economy
by reforming labour laws and boosting education and training
to ease skills shortages.
institutions
Legal Framework Australia's legal system is based on English common law. The
structure reflects the federal structure, with states and territories
having their own court systems. The high court is the final court
of appeal in respect of all matters, whether decided in federal
or state jurisdictions. Until 1986, the UK's Privy Council, the
final court of the Commonwealth of Nations, was the ultimate
avenue of appeal.
The Industrial Relations Court of Australia was established in
March 1994 to deal with a range of industrial relations matters.
29Business Monitor International Ltd www.businessmonitor.com
business environment
taBLe: BMi Business anD operation risK ratinGsinfrastructure rating institutions rating Market orientation rating Business environment
Afghanistan 21.8 20.1 17.9 19.9
australia 80.3 85.8 68.1 78.0
Bangladesh 40.5 35.2 39.1 38.3
Bhutan 28.8 43.3 29.0 33.7
cambodia 37.4 31.8 52.0 40.4
china 66.0 56.6 55.7 59.4
hong kong 71.1 84.2 80.7 78.7
india 47.4 41.8 48.8 46.0
Indonesia 37.1 31.2 52.3 40.2
Japan 76.4 77.1 49.8 67.8
Laos 39.2 28.7 35.3 34.4
Malaysia 60.1 74.9 70.9 68.6
Maldives 42.7 43.7 41.3 42.6
nepal 29.4 29.9 30.8 30.0
New Zealand 69.3 92.7 65.3 75.7
Pakistan 33.4 37.0 41.1 37.2
Philippines 48.6 36.8 60.1 48.5
singapore 71.1 84.2 80.7 80.8
south korea 63.0 79.1 71.3 71.1
sri lanka 45.7 42.5 40.0 42.7
taiwan 56.1 68.2 61.4 61.9
thailand 61.0 56.8 67.2 61.7
vietnam 58.2 39.0 62.2 53.1
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
Legislation that came into force in May 1997 transferred the
jurisdiction of the Industrial Relations Court to the federal court.
The constitution provides for an independent judiciary and, in
practice, it is independent of political influence. The actions of
all governments are subject to constitutional interpretation by
the high court. For federal judges, their security of tenure is
guaranteed by the constitution.
The legal system is modern, efficiently run and ensures the
enforcement of contracts in a non-discriminatory manner. Com-
mercial disputes are typically resolved through litigation and
arbitration, and Australia has pioneered alternative modes of
dispute resolution outside the courts system, which have also
proved highly effective. For example, Australian courts provide
quick resolution to intellectual property disputes. Investment
disputes are rare in Australia. The country is a signatory to all
the main international dispute resolution conventions.
property rights Property rights are well protected through the courts, although
private property can be expropriated for public purposes. Due
process rights are respected and appropriate compensation is
paid. However, the federal system in operation means each
state in Australia has a different regime for the regulation of
land rights.
intellectual property rights Intellectual property rights (IPR) laws afford protection for
copyright work, patents, trademarks and designs. The legisla-
tion is primarily based on statute, as is the case in other former
British colonies. IPR disputes are usually litigated in the federal
court. A bilateral free trade agreement between Australia and
the US became operational on January 1 2005 and aligns the
former's IPR legislation closely with that of the US.
Australia's raft of IPR regulations are regarded as ensuring
greater protection than multilateral agreements such as WTO's
Agreement on Trade-Related Aspects of Intellectual Property
Rights and World Intellectual Property Organization treaties.
corruptionWidespread levels of transparency ensure that corruption is
kept to a minimum, with effective monitoring mechanisms in
place. Australia is an active participant in international efforts
to end the bribery of foreign officials. Legislation explicitly
30 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: BMi LeGaL FraMeWorK ratinGinvestor protection score rule of Law score contract enforceability
scorecorruption score
Afghanistan 1.9 0.5 20.1 8.5
australia 78.9 94.7 85.8 89.8
Bangladesh 59.1 28.9 35.2 24.4
Bhutan 14.8 63.6 43.3 70.9
cambodia 31.5 14.2 31.8 21.9
china 64.4 48.4 56.6 28.1
hong kong 93.7 91.0 84.2 81.6
india 61.5 58.9 41.8 38.4
Indonesia 53.9 33.6 38.7 27.5
Japan 80.7 88.4 77.1 89.0
Laos 14.0 23.1 28.7 8.4
Malaysia 80.1 70.5 74.9 50.2
Maldives 24.3 49.4 43.7 39.4
nepal 41.8 17.8 29.9 27.7
New Zealand 94.6 97.8 92.7 95.9
Pakistan 46.4 27.8 37.0 17.4
Philippines 36.4 37.3 36.8 21.5
singapore 96.2 93.1 87.1 62.1
south korea 68.5 83.6 79.1 76.8
sri lanka 63.2 56.8 51.8 27.9
taiwan 67.2 84.2 68.2 77.9
thailand 53.7 53.6 56.8 38.7
vietnam 24.4 42.1 39.0 18.1
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
disallowing tax deductions for bribes of foreign officials was
enacted in 2000.
infrastructure
physical infrastructure Despite its comparatively modern transport infrastructure, traffic
congestion in cities, an ageing railway network and bottlenecks
at ports are becoming increasingly important issues.
As the government's fiscal deficit continues to increase, au-
thorities have continued to push out infrastructure spending in
order to rein the growth in debt. As such, the National Building
Project has taken a back seat, with the statutory body, Infra-
structure Australia, drastically reducing the number of projects
on priority list.
Moreover, the disappointing level of fiscal revenues over the last
three years puts its long-term plans at risk, and is likely to force
the government to reassess its willingness to increase debt, tax
rates or user pay schemes. Indeed, the government considered
the idea of issuing a separate category of debt – infrastructure
bonds – as well as tax-rebates for state governments that priva-
tise public assets, in hope of meeting its infrastructure targets.
Despite these hiccups in financing, we continue to see a
need for physical infrastructure to be built as the population
increases. The number of projects under the NBP includes 63
major roads, 11 major railways and six urban public transport
projects. The federal government also remains committed
to the roll-out of the National Broadband Network (NBN)
although it has opted for a cheaper version compared to the
original Labor government plan. The project has been held up
to improve the internet connectivity and reliability in rural and
urban regions, as well as aid medical institutions in the timely
transfer of information.
Labour Force The workforce totals around 11.6mn, out of an overall popula-
tion of some 23.4mn. This represents a participation rate of
roughly two-thirds of the working age population.
Most Australians are employed in the services sector, which
accounts for more than 75% of jobs. Industry accounts for more
31Business Monitor International Ltd www.businessmonitor.com
business environment
taBLe: LaBour Force QuaLitYLiteracy rate,% Labour Market rigidity score Female Labour participation, %
Afghanistan 28.0 20.0 33.1
australia 99.0 0.0 58.4
Bangladesh 52.5 28.0 58.7
Bhutan 54.3 7.0 53.4
cambodia 75.6 36.0 73.6
china 93.0 31.0 67.4
hong kong 93.5 0.0 52.2
india 65.2 30.0 32.8
Indonesia 91.0 40.0 52.0
Japan 99.0 16.0 47.9
Laos 72.5 20.0 77.7
Malaysia 91.5 10.0 44.4
Maldives 97.0 18.0 57.1
nepal 55.2 46.0 63.3
New Zealand 99.0 7.0 61.8
Pakistan 54.2 43.0 21.7
Philippines 93.3 29.0 49.2
singapore 94.2 0.0 53.7
south korea 99.0 38.0 50.1
sri lanka 90.8 20.0 34.2
taiwan 96.1 46.0 n/a
thailand 93.9 11.0 65.5
vietnam 90.3 21.0 68.0
Source: BMI/World Bank/ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score
than 20% of employment. Employment growth has averaged
close 2.0-3.0% over the last five years.
While most of the layoffs during the global financial crisis had
been focused in the financial industry, a range of other sectors –
including high-tech, information and communication technology,
civil engineering, childcare, teaching and health – still suffered
from labour shortages.
Australia enjoys a well-educated labour force. Of those aged
15-64, 48% have post-secondary school qualifications (37% of
these with a degree or higher qualification, 63% with a diploma
or vocational qualification).
The previous Australian Labor Party (ALP) government's re-
versal some of the previous Liberal government's far-reaching
deregulation of labour relations has reduced the flexibility of the
labour market and led to a rise in trade union power. However,
the current Liberal-National coalition, under Prime Minister
Tony Abbott, is keen to relook these rules ensure that the labour
market remains generally competitive for business.
The previous John Howard (Liberal-National coalition) govern-
ment had introduced wide-ranging reforms of industrial relations
intended to boost labour force participation rates and increase
productivity. To increase participation, a package of reforms
was unveiled to encourage unemployed Australians to find work.
These reforms include the lightening of the regulatory burden,
through altering the way minimum wages are set by creating a
Fair Pay Commission to replace the previous adversarial system
for setting minimum wages.
It also wanted to reduce employment protection by overhauling
unfair dismissal laws, leaving them to deal only with com-
panies employing more than 100 staff, as well as extending
the qualification period for unfair dismissal coverage from
three to six months. However, the previous ALP government
had rolled back part of these reforms and labour unions were
strengthened, and replaced the Fair Pay Commission with Fair
Work Australia.
In August 2013, Fair Work Australia approved an AUD15.80 rise
in the minimum wage to AUD622.20 per week, after freezing
hikes in the previous year. Australia's industrial relations have
been in a state of flux, as economic deterioration has weigh on
firms' ability to afford the demands put forth by unions.
The ALP government, over 2009-2013, rebuild some parts of
the old centralised arbitration system, establishing a clear set
of rules regulating Enterprise Bargaining Agreements, which
would encapsulate the agreement between employers, employees
and unions.
32 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: asia – annuaL FDi inFLoWs2009 2010 2011
us$bn per capita us$bn per capita us$bn per capita
australia 26.6 1,212.4 35.6 1,596.7 41.3 1,827.7
Bangladesh 0.7 4.8 0.9 6.1 1.1 7.6
cambodia 0.5 38.6 0.8 55.4 0.9 62.3
china 95.0 71.2 114.7 85.5 124.0 92.0
hong kong 52.4 7,497.7 71.1 10,076.2 83.2 11,675.6
india 35.6 29.5 24.2 19.7 31.6 25.4
Indonesia 4.9 20.5 13.8 57.4 18.9 78.0
Japan 11.9 94.3 -1.3 -9.9 -1.8 -13.9
Malaysia 1.5 52.0 9.1 320.5 12.0 414.6
Mongolia 0.6 233.4 1.7 626.0 4.7 1,725.2
New Zealand -0.8 -176.1 0.6 145.5 3.4 761.8
Pakistan 2.3 13.7 2.0 11.6 1.3 7.5
Philippines 2.0 21.4 1.3 13.9 1.3 13.3
singapore 24.4 4,937.2 48.6 9,562.1 64.0 12,336.9
south korea 7.5 156.4 8.5 176.6 4.7 96.3
sri lanka 0.4 19.5 0.5 22.9 0.3 14.3
taiwan 2.8 121.3 2.5 107.6 -2.0 -84.5
thailand 4.9 71.6 9.7 142.8 9.6 139.7
vietnam 7.6 87.5 8.0 91.1 7.4 83.7
Source: BMI, UNCTAD
The agency's dispute settlement powers were also increased.
The Liberal-National coalition government, which term began
in late 2013, has announced that it would do away with Fair
Work ombudsman created by the ALP, but noted that awards,
or minimum conditions and wages, should be revised lower to
reflect the changing economic trends.
Industrial disputes are rare and the old power of the trade unions
was weakened during the 1990s amid service sector growth.
Despite the reduced union participation as of total workforce,
there has been increasing intrusion by the unions in the recent
years. This has come in the form of greater frequency of work-
place inspections and pay disagreements in both the private
and public sectors.
In the federal and state systems, industrial relations tribunals
conciliate in industrial disputes and, if the employer and the
union cannot reach agreement, issue an arbitrated settlement
binding on both parties. However, the coalition government is
keen to ensure that union demands are within means, and this
new priority could serve to balance out the increase in power
unions have gained during the years under the ALP government.
Market orientation
Foreign investment policy Growing demand for Australia's abundant natural resources from
Asia suggest that foreign interest to invest in key sectors such
as iron ore, coal, oil and gas will remain, albeit lower than its
previous peaks recorded in the early 2000s. The recent change in
power to the Liberal-National right-leaning coalition is unlikely
to undo much of the changes in foreign investment policy.
While the National party is generally keener to limit the amount
of local assets foreigners can buy, we believe that their Liberal
partners will be more prioritise business imperatives. Indeed,
Prime Minister Tony Abbott is keen to conclude the free trade
agreement with China that is currently under negotiations. That
said, we believe that land purchases by foreigners will remain
a very sensitive issue, and see the possibility of the threshold
values for land purchases lowered. Much of Australia's FDI
activity results from cross-border mergers and acquisitions
(M&As). The Australian M&A market is one of the most active
markets in the world.
33Business Monitor International Ltd www.businessmonitor.com
business environment
taBLe: traDe anD inVestMent ratinGsopenness to investment score openness to trade score
Afghanistan 11.2 25.1
australia 71.1 39.1
Bangladesh 22.1 37.6
Bhutan 16.5 45.1
cambodia 54.0 82.9
china 47.7 70.0
hong kong 49.5 98.9
india 53.8 42.0
Indonesia 56.8 58.3
Japan 7.8 40.1
Laos 69.0 19.8
Malaysia 50.6 98.7
Maldives 87.1 28.0
nepal 4.8 59.5
New Zealand 40.9 52.6
Pakistan 31.8 51.7
Philippines 46.4 69.6
singapore 47.7 99.2
south korea 51.4 83.7
sri lanka 50.3 57.3
taiwan 11.7 91.4
thailand 61.6 89.5
vietnam 79.7 96.5
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
FDI Regime The investment climate remains favourable, with few restric-
tions on investment or the repatriation of earnings and capital.
Although the government supports an open investment policy,
there is a nationalist slant to its stance: the government retains
the power to block proposals deemed 'contrary to the national
interest'.
The Foreign Investment Review Board (FIRB) screens invest-
ment proposals. The regulation of foreign investment is governed
by the Foreign Acquisitions and Takeovers Act (FATA) 1975
and the Foreign Acquisitions and Takeovers Regulations 1989.
The government operates a sector-specific FDI policy. Although
the terms of the FATA were amended in 2007, raising the
threshold for investments that require screening, these have
recently been lowered with a view to increase Australia's appeal
as a destination for investment in a period of global economic
downturn.
Foreign investment proposals that need prior government ap-
proval include:
• Direct stakes of 15%+ in companies business worth
AUD244mn or more, as of 2011. For US and New Zealand
investors – covered by bilateral investment agreements – an
existing notification threshold of AUD1, 062mn for non-
sensitive sectors remains in place.
• Proposals to establish new businesses involving a total
investment of AUD10mn or more (US investors again
excluded).
• All FDI proposals in airports and the media sector, irre-
spective of size.
• Any investment by a state-owned entity.
• FDI proposals involving the acquisition of an interest in
urban land, where the foreign entity, or the gross value of
the assets of its Australian subsidiaries, exceed AUD200mn
(previously AUD50mn).
In the majority of industry sectors, smaller proposals are exempt
from notification. In practice, relatively few proposals are rejected
and most of those are in the real estate sector. However, there
have been several complaints that the process for evaluating
proposals is opaque and that the underlying logic for the FIRB
is not always consistent or clear.
There are no prohibitions on overseas investment or capital
repatriation.
The Manufacturing-in-Bond scheme allows exporting manufac-
turers to import components and materials free from up-front
customs, excise and sales tax charges.
The top destination sectors for FDI are information technology
and software, food and beverages, and metals/mining/hydrocar-
bons – the mining sector is 50-60% foreign-owned. Key investor
countries are the US, the UK, Japan and Hong Kong/China.
Foreign trade regime Spearheaded by the Australia-US free trade agreement (FTA),
Canberra has pursued bilateral trade pacts to secure progress on
cornerstone issues such as trade in agricultural products. It has also
pursued multilateral negotiations under the Doha round. Average
most favoured nation (MFN) tariff rates are among the world's
lowest – a sign of the country's commitment to trade liberalisation.
Aside from the Australia-US FTA that came into effect in
January 2005, there are trade agreements with New Zealand,
Thailand and Singapore. The US FTA eliminated 99% of US-
manufactured industrial and consumer goods tariffs, and all
US agricultural product imports. Australia is currently in talks
34 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: top export Destinations, 2002-2009 2002 2003 2004 2005 2006 2007 2008 2009
china,P.r.: Mainland 4,528.10 5,929.40 7,946.10 12,075.00 14,986.90 20,067.20 27,068.10 33,499.20
Japan 12,050.90 12,839.70 16,095.20 21,305.10 23,864.60 26,677.10 41,229.10 29,474.90
korea 5,424.60 5,253.10 6,664.80 8,251.70 9,186.50 11,359.00 15,215.20 12,108.20
india 1,353.80 2,194.30 3,994.60 5,266.30 6,738.90 7,774.40 11,288.10 11,542.80
United States 6,247.90 6,141.20 6,995.00 7,052.60 7,547.20 8,514.30 10,290.10 7,599.80
total 61,183.90 67,325.60 82,278.20 100,174.80 116,439.50 135,633.20 177,627.60 147,960.40
toP 5 29,605.30 32,357.60 41,695.70 53,950.70 62,324.10 74,391.90 105,090.60 94,224.90
% from top 5 trade partners 48.4 48.1 50.7 53.9 53.5 54.8 59.2 63.7
Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report
over a bilateral trade agreement with China, along with the Gulf
Co-operation Council, Malaysia and South Korea (as of August
2011). It is also a member of the of the Asia Pacific Economic
Cooperation forum, where it has argued strongly for accelerat-
ing trade liberalisation.
Tariffs/Non-Tariff Barriers: Australia's simple average applied
tariff fell from 6.1% in 1996 to 4.3% in 2002, and then to 3.53%
as of 2006. Nearly half of Australia's applied MFN tariff lines
are now zero. Over 85% of tariff line rates are 5% or lower.
The coalition government is likely to continue pursuing further
liberalisation of trade. The few remaining high tariff rates are
being cut – in January 2005, tariff rates on textiles were reduced
from 25% to 17.5%. The rate on car imports was slashed from
15% to 10%. By 2015, textile tariffs will be reduced to 5%,
while those for cars haves been reduced to 5% by the earlier
deadline of 2010.
Australia's non-tariff barriers do not have a decisive bearing on
merchandise trade. There are virtually no tariff quotas and few
non-tariff barriers of any description, such as subsidies. Anti-
dumping measures have only rarely been exercised.
tax regime Tax incentives are deployed for companies in target sectors
such as research and development, pharmaceuticals and venture
capital – where capital gains tax exemptions apply to foreign
investors from specific countries, including the US, the UK,
Japan, Germany, France and Canada. Tax is levied at federal,
state and municipal levels.
The coalition government aims to roll-back a number of sweep-
ing changes introduced by the previous ALP administration,
including the 30% Minerals Resource Rent Tax on all extrac-
tive businesses, following the China-induced mining boom in
the late 2000s, and the Clean Energy Bill, which would levy
a tax on each tonne of carbon emitted beyond the company's
allocated amounts.
Key policies that are currently in place:
Corporate Tax: The standard rate is 30%. Non-resident com-
panies are taxed on Australian-source income only. Losses may
be carried forward indefinitely, but may not be carried back.
In May 2010, the ALP government announced plans to reduce
this rate to 28% over the next few years in order to increase
Australia's competitiveness.
Individual Tax: Individual tax rises progressively to 45%. Tax-
able income from wages, dividends, interest, rent and royalties
is aggregated and charged at progressive rates to 45%, with
different bands applying to residents and non-residents. For
FY2011/12, a 'flood levy' of 0.5% and 1.0% to pay for repara-
tions following the Queensland floods in January 2011 will be
imposed on taxpayers earning AUD50,001-AUD100,000 and
more than AUD100,000 respectively.
Indirect Tax: A goods and services tax is levied at a 10% rate.
Registration is compulsory for businesses with annual turnover
of more than AUD50,000. Exports, basic foods, water, education
and medical services are zero-rated.
Capital Gains: Capital gains are generally taxed as income,
subject to rollover relief. Non-residents are subject to capital
gains tax only on the disposal of assets that are considered to
have a necessary connection with Australia.
Withholding Tax: Unfranked dividends are taxed at 30%,
franked dividends 0%, interest 10% and royalties 30%.
Carbon Tax: An initial levy AUD23/tonne of carbon emis-
sions will be imposed on polluting companies from mid-2012,
increasing by 2.5% per annum before gradually transitioning
into a market-based pricing mechanism by 2015. This legisla-
tion will have significant impact on carbon- or energy-intensive
industries, including mining and aviation.
operational risk
security risk There remains a general threat from terrorism in Australia. The
British Foreign and Commonwealth Office has warned that
terrorist attacks cannot be ruled out and could be indiscrimi-
nate, including in places frequented by expatriates and foreign
travellers. The Australian authorities have carried out a number
of arrests as a result of investigations into terrorist networks.
On November 3 2005, the government introduced an urgent
amendment to the counter-terrorism legislation in response
to an assessment by Australian intelligence agencies that a
terrorist attack in Australia is feasible and could well occur.
Subsequently, on November 8 2005, the Australian police
arrested 16 people in Sydney and Melbourne in a counter-
terrorism operation designed to disrupt preparations for a ter-
35Business Monitor International Ltd www.businessmonitor.com
business environment
rorist attack. On March 31 2006, a further three people were
arrested on terrorism charges in Melbourne.
Australia's involvement in the US-led 'War on Terror' will prob-
ably keep it a potential terrorist target. Although the govern-
ment began withdrawing its combat troops (numbering around
500) from southern Iraq in June 2008, Australia is committed
to security operations in Afghanistan. It has around 1,500
soldiers stationed in southern Afghanistan and the government
has indicated its commitment to maintain its military presence
there. With the US pull-out from Afghanistan due by 2014, the
previous Gillard government announced that most of the Aus-
tralian forces will return by end-2013, even as the government
continues to provide international aid and military funding for
Afghanistan security forces.
36 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
autos
BMi industry ViewSince our last quarterly update, the Australian people have voted
in a new Liberal-National coalition government. The new Prime
Minister, Tony Abbott, has said that his government will now
look at the financial assistance pledged to the auto industry by
the former Labor administration and BMI believes that the do-
mestic auto industry is now at a crossroads. Should the Abbott
government fail to provide sufficient financial assistance moving
forward, we believe there could well be a withdrawal from pro-
duction by one or both of the two remaining local automakers.
The arrival of the new Liberal-National coalition government
certainly spells tough news for the car industry at face value.
Prime Minister Abbott has been unmoved on his stance to
cut the previous Labor government's funding to the automo-
tive industry under the automotive transformation scheme by
AUD500mn (US$475mn), which will leave automakers with
funds of only about AUD1bn (US$950mn) for the remaining
years up to 2015. This, of course, has raised alarm bells among
Victorian and South Australian state governments, given that a
withdrawal by the current automakers could cause a significant
spike in job losses.
Despite the adverse impact on jobs, some politicians from the
Liberal-National coalition remain implacably opposed to further
taxpayer handouts to auto manufacturers. As locally produced
cars wrestle with cheaper imports, while the expensive local
currency also obstructs the industry's exports from making
headways in the global market, the outlook for future produc-
tion looks tenuous at best, and as such, it is unsurprising that
the coalition government is reassessing pledges made to original
equipment manufacturers (OEMs) previously.
BMI believes there will be an intense debate in parliament in the
next few months on whether the government should continue to
support domestic vehicle production (and the extent of support
if so) and findings of the Productivity Commission (a taskforce
set up by the government to assess the viability of the local auto
industry), whose final report is due sometime in March 2014,
will be crucial in influencing the outcome of the debate.
It is BMI's long-held view that auto manufacturing in Australia
remains uncompetitive, due to the strong Australian dollar and
the country's high labour costs. Ford Australia recently decided
to shutter its local manufacturing operations by 2016 as the vast
gap in costs between its Australian and other overseas opera-
tions meant that maintaining its Australian production base no
longer made financial sense.
Both GM Holden and Toyota Australia, the other two remain-
ing locally producing carmakers, have asked the new govern-
ment for some form of financial assistance for the production
of some of their models.
According to Abbott, his plan to scrap the carbon tax would
increase the competitiveness of the auto industry as he believes
that the tax is adding roughly AUD400 (US$380) to the cost
of every car manufactured in Australia. While it is hard to as-
certain the exact increase in costs borne by firms as a result of
the carbon tax, we remain sceptical that its abolition will bring
about a revival in the industry's fortunes.
At base, it is the high cost of labour and an uncompetitive Aus-
tralian dollar which are the key problems effecting the entire
supply chain of the Australian auto industry. As such, we believe
that the scrapping of the carbon tax will do nothing to address
these issues. Consequently, BMI is now increasingly negative
on the outlook for local car production over the medium term
and will report further on developments as they occur.
One step that the new government has taken to support the lo-
cal car industry is the reversal of Labor's prior decision in July
2013 to make changes to the country's fringe benefit tax system
for vehicles used partly for business and partly for private use.
This would have required owners of company cars to fill out
logbooks detailing their personal and business use of their cars.
Previously, it has been accepted that owners of company cars
only have to declare 20% personal use of these cars.
The Federal Chamber of Automotive Industries (FCAI) had
37Business Monitor International Ltd www.businessmonitor.com
Chapter 5: Key sectors
considered that confusion among Australian business as to
whether or not the FBT changes would take effect was one of
the major reasons behind the 3.1% fall in new vehicle sales
recorded over October 2013, despite the release of some posi-
tive economic indicators. Indeed, business sales were down by
10.5%, compared to a 4.4% increase in private sales for the
month, indicating that businesses were holding back from new
car purchases until there was clarity over FBT.
In November 2013, new Treasurer Joe Hockey confirmed that the
government would not bring in the July 2013 changes proposed
by Labor and that the car industry was 'back open in Australia'.
Although BMI would not go that far, given the proposed cuts
to subsidies to automakers, the removal of uncertainty around
FBT will prove a support.
Looking at new vehicle sales, they were up by 2.6% over the
first 10 months of 2013, at 942,547 units, according to data re-
leased by the FCAI. Breaking down the headline figure reveals
a mixed picture, with passenger car sales now down by 0.8%
y-o-y, at 469,679 units, but SUV and commercial vehicle sales
performing strongly. Indeed, SUV sales were up by 8.1% y-o-y,
at 276,079 units, while LCV sales rose by 4%, to 170,442 units
and HCV sales increased by 2.5%, at 26,347 units.
industry ForecastSales
Aside from political uncertainty, there are also indications that
the macroeconomic backdrop is deteriorating, which will have
negative implications for new car sales in Australia. Indeed,
recent economic data releases suggest that the slowdown in
economic activity in Australia is becoming increasingly evident.
For now, BMI's Country Risk team maintains its outlook for
real GDP growth to come in at a sombre pace of 2.4% in 2013,
dropping to 2.0% in 2014, as the mining industry pares back
its investments weighed down by high costs and the weakening
Chinese economy dims the industry's profit outlook.
Moreover, we believe that the housing market remains precari-
ous, as affordability of homes continues to edge to new lows.
Given our poor outlook for the Australian job market in 2013,
in which we forecast unemployment to reach 6.0% by the end
of the year, we believe that demand for housing will decline.
The overextended household balance sheets further augur the
growth in housing-related credit growth. In our opinion, the
Australian banking sector is the sector most leveraged on the
housing market and we expect that declines in house prices will
adversely impact the industry. Australian new car sales grew
by 10.3% y-o-y in 2012 to reach 1,112,032 units, according to
figures released by FCAI. Growth in the industry was led by
the sports utility vehicle (SUV) and light commercial vehicle
(LCV) segments, which grew by 25.3% and 12.1% respectively.
Commenting on the strong results, FCAI CEO Tony Weber
cited 'reduced tariffs as well as changing consumer preferences',
with SUVs now accounting for 27.5% of the total Australian
vehicle market. Weber also underlined that three out of the Top
10 best-selling cars were Australian made, 'dispelling any sug-
gestion that our domestic manufacturers aren't producing cars
that Australian want to buy'.
Production
In what could prove a potentially devastating game-changer
for the Australian auto industry, Ford Australia announced in
38 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: autoMotiVe saLes, 2011-2017 2011 2012 2013e 2014f 2015f 2016f 2017f
Vehicles, units 1,008,437 1,112,032 1,130,851 1,116,876 1,101,055 1,105,830 1,123,174
Vehicles, units, % chg y-o-y -2.6 10.3 1.7 -1.2 -1.4 0.4 1.6
Passenger cars, units 803,450 882,680 895,920 886,961 875,431 884,185 901,869
Passenger cars, units, % chg y-o-y -2.9 9.9 1.5 -1.0 -1.3 1.0 2.0
Passenger cars, % of total domestic vehicle unit sales 79.7 79.4 79.2 79.4 79.5 80.0 80.3
Commercial vehicles, units 204,987 229,352 234,931 229,915 225,624 221,645 221,305
Commercial vehicles, units, % chg y-o-y -1.5 11.9 2.4 -2.1 -1.9 -1.8 -0.2
Commercial vehicles, % of total domestic vehicle unit sales 20.3 20.6 20.8 20.6 20.5 20.0 19.7
Light commercial vehicles, units 176,940 198,302 203,260 199,194 195,210 190,928 189,973
Light commercial vehicles, units, % chg y-o-y -1.5 12.1 2.5 -2.0 -2.0 -2.2 -0.5
Heavy trucks, units 28,047 31,050 31,671 30,721 30,414 30,718 31,332
Heavy trucks, units, % chg y-o-y -2.0 10.7 2.0 -3.0 -1.0 1.0 2.0
e/f = BMI estimate/forecast. Source: BMI
May 2013 that it would be ceasing production of cars in October
2016, when it closes its Broadmeadows car factory and Geelong
engine plant (both in South Australia). Analysts estimate that
the closure of these two plants will lead to the direct loss of
1,200 jobs, with additional lay-offs now likely in the supplier
and component industries.
Ford's move comes amid soaring manufacturing costs (both
high labour costs and a strong Australian dollar) and falling
sales on the local market. Local consumers have turned away
from the larger cars (such as the Falcon) being produced by
Ford, in favour of cheaper, more fuel-efficient Japanese imports,
such as the Mazda 3. Announcing the closure, Ford Australia's
President, Bob Graziano, stated that the company's production
costs were twice those of Europe and nearly four times higher
than in Asia. In conclusion, Graziano said that 'manufacturing
is not viable for Ford in Australia in the long term'.
Ford started manufacturing cars in Australia in 1925 and is
currently the third-largest domestic carmaker, behind GM
Holden and Toyota. However, the company has been posting
significant losses in recent years, with the company reporting a
loss of AUD141mn for FY11/12 and a total loss of AUD600mn
for the past five years.
Although Ford will retain some 1,500 employees in Australia
across its dealerships and product development facilities, it is
clear that its withdrawal from local production will be a blow
to the South Australian economy in particular.
It has been BMI's long-held view that car manufacturing is
not competitive in Australia due to a number of factors, such
as a strong Australian dollar and high labour costs. We are not
surprised by Ford's decision to exit local production given that
it produces the least number of cars among the three domestic
automakers and yet enjoyed the highest amount of government
subsidies, per car manufactured locally, in 2012.
While the Australian dollar is finally weakening, which will
provide some respite to local carmakers, we believe it has
come a little too late for Ford. The automaker has seen its lo-
cal production steadily dwindle over the years as sales of its
'Falcon' model struggled against the more competitively priced
imported Japanese and Korean brands. Sources indicate that at
least 100,000 units need to be manufactured by a carmaker in
order to maintain profitable operations and Ford's volumes are
nowhere near that. Ford's decision to exit local manufacturing
operations will also have wider ramifications for the automotive
industry in Australia.
While Ford enjoyed over AUD1bn (US$0.96bn) in subsidies
from 2001-2012, the firm's announcement of its plant closures
by 2016 is likely to prevent the Australian government from
affording any more subsidies to the carmaker. However, the
government might need to justify whether past subsidies to
Ford were a good decision. Also, there will be fresh debate on
the issue of supporting auto manufacturing in Australia and the
government will be forced to re-examine the economic benefit
of subsidies promised to the other two local carmakers, Toyota
Motor and GM Holden, especially if they too decide to withdraw
from local manufacturing.
For now, GM Holden and Toyota have stated they remain com-
mitted to local production. Holden has previously stated that
it is committed until 2022 at least, with local production of a
new Cruze model and a new large sedan to replace the popular
39Business Monitor International Ltd www.businessmonitor.com
key sectors
taBLe: autos proDuction, 2011-2017 2011 2012 2013e 2014f 2015f 2016f 2017f
Vehicles, units 224,193 209,730 206,690 209,006 213,166 217,703 222,344
Vehicles, units, % chg y-o-y -7.9 -6.5 -1.4 1.1 2.0 2.1 2.1
Passenger cars, units 189,503 178,480 175,803 177,561 181,112 184,734 188,429
Passenger cars, units, % chg y-o-y -7.7 -5.8 -1.5 1.0 2.0 2.0 2.0
Passenger cars, % of total domestic vehicle unit production 84.5 85.1 85.1 85.0 85.0 84.9 84.7
Commercial vehicles, units 34,690 31,250 30,887 31,446 32,054 32,968 33,915
Commercial vehicles, units, % chg y-o-y -9.1 -9.9 -1.2 1.8 1.9 2.9 2.9
Commercial vehicles, % of total domestic vehicle unit production - - - - - - -
Light commercial vehicles, units 29,873 26,170 25,908 26,426 26,955 27,764 28,597
Light commercial vehicles, units, % chg y-o-y -12.4 -12.4 -1.0 2.0 2.0 3.0 3.0
Heavy trucks, units 4,817 5,080 4,978 5,019 5,099 5,205 5,319
Heavy trucks, units, % chg y-o-y 18.9 5.5 -2.0 0.8 1.6 2.1 2.2
e/f = BMI estimate/forecast. Source: BMI
Commodore in 2016. In a press release, Toyota Australia said
that it 'intends to maintain its operations in Australia', with the
company having only recently opened a refurbished AUD330mn
engine production facility in December 2012 at its Altona plant.
While the exit of a competitor might prove a boon in the short
term, Toyota and Holden need to consider whether their op-
erations are going down the same path as Ford and whether it
might be better to pull the plug on them as well. Furthermore,
should Ford's decision cause the government to pull funding for
automakers, due to its deemed inefficiency, Toyota and Holden
will need a plan to maintain profitability even without govern-
ment aid. This will especially be the case if the Liberal-National
coalition triumphs in the September 2013 election.
Even before Ford's announcement, recent newsflow from the
sector had only added to the sense of increasing doom facing the
Australian car production industry. In April 2013, GM Holden
announced that it would be cutting a further 500 jobs at its
Adelaide plant. This brings direct job losses in the Australian
car industry close to 2,000 over the past 12 months and indirect
job losses in the component and other supporting industries to
several thousands more. South Australian Premier Jay Weatherill
is reportedly furious over this development and is now reassess-
ing the AUD50mn (US$52.7mn) handout promised to Holden
a year ago by his government.
Holden has blamed a flood of cheap imports, due to the weak-
ness of the Japanese yen against the Australian dollar, for the
decision to cut further jobs. According to Holden Chairman
Mike Devereux, a car which cost AUD20,000 (US$21,092) to
import five months ago, now costs just AUD15,000 (US$15,819).
Sales of the locally produced Cruze, Holden's best-selling car,
plunged by 13.7% in 2012. However, the imported Mazda 3 was
the top selling car in Australia in 2012, with five other Japanese
brands also in the top 10.
In BMI's opinion, it is unfair for Holden to blame its current
woes solely on cheap imports. While the massive 25% depre-
ciation of the yen against the Australian dollar since October
2012 has clearly exacerbated Holden's problems, we believe
the firm was suffering from a lack of competitiveness before
this. Holden's domestic sales have been steadily declining
over recent years.
This suggests to us that, besides currency movements, other
factors such as wage levels are equally important in determining
the firm's competitiveness. With Australia having one of the
highest minimum wages in the world, manufacturing firms are
unfairly penalised as they see their production costs escalate.
While it is perfectly acceptable for an automaker to shed its
labour force to remain more competitive, what makes Holden's
decision controversial is the fact that it has received over
AUD2.2bn (US$2.32bn) in government subsides over the past
decade. Holden's recent move has reignited the debate over the
long-term viability of car production in Australia, with lawmak-
ers having different opinions on the amount as well as type of
subsidies to be handed out to the car industry. BMI too has
recently highlighted the possibility of subsidies being reduced
or varied, due to opposition in some sectors to the futile nature
of artificially propping up a flagging industry.
40 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: autos traDe, 2011-2017 2011 2012 2013e 2014f 2015f 2016f 2017f
Vehicle trade balance, units -784,244 -902,302 -924,161 -907,870 -887,889 -888,127 -900,829
Vehicle trade balance, units, mn -0.8 -0.9 -0.9 -0.9 -0.9 -0.9 -0.9
Vehicle trade balance, units, % chg y-o-y -1.0 15.1 2.4 -1.8 -2.2 0.0 1.4
Passenger car trade balance, units -613,947 -704,200 -720,117 -709,400 -694,318 -699,451 -713,440
Passenger car trade balance, units, mn -0.6 -0.7 -0.7 -0.7 -0.7 -0.7 -0.7
Passenger car trade balance, units, % chg y-o-y -1.3 14.7 2.3 -1.5 -2.1 0.7 2.0
Commercial vehicle trade balance, units -170,297 -198,102 -204,044 -198,470 -193,571 -188,677 -187,390
Commercial vehicle trade balance, units, mn -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
Commercial vehicle trade balance, units, % chg y-o-y 0.2 16.3 3.0 -2.7 -2.5 -2.5 -0.7
Light commercial vehicle trade balance, units -147,067 -172,132 -177,351 -172,768 -168,255 -163,164 -161,376
Light commercial vehicle trade balance, units, mn -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
Light commercial vehicle trade balance, units, % chg y-o-y 1.1 17.0 3.0 -2.6 -2.6 -3.0 -1.1
Heavy truck trade balance, units -23,230 -25,970 -26,693 -25,702 -25,315 -25,513 -26,013
Heavy truck trade balance, units, mn 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Heavy truck trade balance, units, % chg y-o-y -5.4 11.8 2.8 -3.7 -1.5 0.8 2.0
e/f = BMI estimate/forecast. Source: BMI
Food & Drink
BMi industry ViewSince the September elections, the Australia economy has re-
corded an uptick in activity levels and business sentiment from
the lows recorded earlier in 2013, supported by both domestic
and external factors. Domestically, prospects of lower regulatory
burden, ranging from taxes to various regulatory procedures,
have helped lift the outlook for certain industries, such as oil
and gas. Moreover, September's readings of the performance
indices showed that deterioration in the services and construction
sectors were moderating, while activity in the manufacturing
sector posted expansion in both September and October. Still,
we continue to see a shift of consumption habits towards private
labels in Australia over the coming years as a growing number
of consumers acknowledge private labels as a very compelling
alternative to proprietary branded goods.
Headline Industry Data (local currency)
• 2014 per capita food consumption = +0.7%; forecast to
2018 = +1.4% CAGR.
• 2014 soft drinks sales = +2.1%; forecast to 2018 = +2.6%
CAGR.
• 2014 alcoholic drinks sales = +1.9%; forecast to 2018 =
+2.4% CAGR.
• 2014 mass grocery retail sales = +3.4%; forecast to 2018
= +4.3%.
Key Industry Trends And Developments
ADM To Face Challenges Amid Acquisition Collapse: Aus-
tralian authorities recently rejected US-based Archer Daniels Midland (ADM)'s bid for Australian grain trader GrainCorp,
dealing a blow to ADM's efforts to diversify away from its
focus on the US corn and soybean industries. ADM, which
already owns 19.9% of GrainCorp, was seeking to acquire the
remaining 80.1%. Currently, ADM receives 52.0% of its rev-
enues from these industries, and it was particularly vulnerable
to the US drought in 2012. The company is also highly exposed
to mature markets, where we see little potential for growth to
pick up in the medium term. In order to increase its geographic
diversification in recent years, ADM has already acquired stakes
in Wilmar International, which operates in oilseeds in Asia,
and Toepfer, a German grain and oilseed trader operating in
Australia. However, the purchase of GrainCorp would have
increased ADM's market share in the wheat and barley markets,
as GrainCorp controls most of the grain storage and export
facilities in eastern Australia.
WFA Launches Action To Boost Wine Industry: The Win-
emakers' Federation of Australia (WFA) has issued a new report
that includes 43 specific actions aimed at boosting the country's
wine sector in domestic and export markets. The report, dubbed
'Actions for Industry Profitability 2014-16' targets key industry
issues, such as capturing the demand opportunities for Austral-
ian wine globally, the wine and health debate and working with
national wine retailers on improving the category in the country.
The new actions have been put in place to improve industry
settings to grow domestic and export markets and lift industry
profitability, according to WFA president Tony D'Aloisio.
Risks To Outlook
Policies implemented by major economies like Japan, China and
the US will likely have a significant impact on Australia. For
example, Japan's policy direction on its use of nuclear power
could have a drastic impact should it decide to turn its reactors
back on. Should Japan, the US and/or China enact more stimu-
lus as their economies lose traction in 2014, the rebalancing in
Australia could be delayed as the Australian dollar could face
appreciatory pressures while demand for the country's mineral
exports remain supported. Australian banks continue to be highly
exposed to the domestic housing market. Given their reliance
on external markets for funding, the banks could face a liquidity
crisis should external counterparts withhold funding due to the
deterioration of their balance sheets as the housing market sours.
In order to prevent financial panic, government intervention could
be needed in this scenario, which could force the budget deficit
41Business Monitor International Ltd www.businessmonitor.com
key sectors
taBLe: FooD consuMption inDicators – HistoricaL Data & Forecasts, 2013-2018 2013e 2014f 2015f 2016f 2017f 2018f
Food consumption AUDbn 60.2 61.4 62.9 64.6 66.5 68.5
Food consumption, AUD per capita 2,580.0 2,599.3 2,628.7 2,667.8 2,712.2 2,758.8
Food consumption, US$bn 59.3 53.7 50.3 49.4 49.9 51.4
Food consumption, US$ per capita 2,540.5 2,274.4 2,103.0 2,040.9 2,034.1 2,069.1
e/f = BMI estimate/forecast. Source: BMI, Australian Bureau Of Statistics
into double-digit territory.
industry ForecastFood
Food Consumption
• Food consumption is forecast to post a compound annual
growth rate (CAGR) of 2.6% from 2013 to 2018 in local
currency terms.
• Per capita food consumption is expected to post a CAGR
of 1.3% in local currency terms between 2013 and 2018.
On the back of subdued domestic demand conditions, we forecast
slower food consumption growth of 1.9% (in local currency
terms) for 2014. As consumers tighten their purse strings amid
declining home values, premiumisation is expected to take a
back seat. Consumers are likely to focus their purchases on
daily necessities and food staples over the coming quarters,
dampening value sales growth in the food sector.
Despite the domestic demand weakness in the short term, BMI
continues to forecast moderate growth for Australia's food
industry over the medium term, with overall food consump-
tion forecast to increase by a compound annual average rate
of 2.6% in local currency terms between 2013 and 2018. Con-
sumer confidence is likely to gradually pick up beyond 2014.
The ongoing proliferation of mass grocery retail outlets in all
communities will account for this growth, although the levels
will be mitigated by strong price competition across all food
and drink sub-sectors. While this is certainly not a phenomenal
growth forecast, we would point out that this is still a notable
growth figure given the well-developed and mature state of the
Australian food industry.
The high food consumption levels in Australia further illustrate
the developed nature of the Australian food industry. Per capita
food consumption is estimated at AUD2,580 in 2013, which is
one of the highest consumption levels in the region. We expect
food consumption on a per capita basis to reach AUD2,758 by
2018, implying scope for premiumisation as consumers develop
a greater preference for higher-value food products.
In particular, consumers are developing a greater appetite for
health and functional food products. As such, we expect more
producers to join the trend and increase production of functional
food products to capitalise on their growing demand. As part of
a partnership with the Australian government, a number of local
retailers and manufacturers such as General Mills, Associated British Foods, Goodman Fielder, Mars Inc, Nestlé, George Weston Foods and Unilever have agreed to cut the amount
of salt and saturated fat in their food products. The Food and
Health Dialogue, a partnership between the industry and the
government, has set salt and saturated fat targets for about 85%
of the leading brand simmer sauces and 95% of processed meats.
Confectionery
• Confectionery value sales are forecast to grow at a CAGR
of 2.1% between 2013 and 2018 in local currency terms,
outperforming confectionery volume sales of 0.6%.
• The sugar sub-sector will be the growth outperformer, with
sales forecast to grow at a CAGR of 3.3% in local currency
terms between 2013 and 2018.
Confectionery is one of Australia's key food processing sectors,
although much of its activity takes place on a smaller scale. The
Australian confectionery sector is a relatively mature market,
and as such BMI forecasts a modest CAGR of 0.6% in confec-
tionery volume sales to reach 169,625 tonnes in 2018, while
value sales are projected to increase at a higher rate of 2.1% to
reach AUD3.7bn.
Two key trends have picked up considerably in the domestic
confectionery sector: premiumisation and the increase in pro-
duction of added-value and healthier confectionery products.
42 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: aLcoHoLic DrinKs VaLue/VoLuMe saLes – HistoricaL Data & Forecasts, 2013-2018 2012 2013e 2014f 2015f 2016f 2017f 2018f
Alcoholic drinks sales, litres mn 2,477.75 2,495.74 2,511.56 2,531.29 2,553.83 2,579.34 2,605.35
Alcoholic drinks sales, AUDmn 10,936.25 11,147.66 11,361.94 11,606.83 11,897.46 12,225.60 12,569.33
Alcoholic drinks sales, AUD per capita 474.45 477.57 480.82 485.17 491.16 498.47 506.17
Beer sales, litres mn 1,884.80 1,893.20 1,900.59 1,909.81 1,920.34 1,932.25 1,944.40
Spirits sales, litres mn 40.07 40.60 41.07 41.66 42.33 43.09 43.86
Wine sales, litres mn 536.17 586.68 582.30 607.74 651.42 704.42 760.81
e/f = BMI estimate/forecast. Source: BMI, Australian Bureau Of Statistics, UN Industrial Commodity Statistics Database
First, with Australian consumers already enjoying very high
existing income levels, they have demonstrated their willing-
ness to pay a premium for Fairtrade products as they play a part
in promoting the sustainability of food processing industries in
developing countries. Eyeing these strong premiumisation op-
portunities, confectionery players such as Nestlé and Arnott's
stated their commitment towards the movement, importing
Fairtrade-certified raw materials such as sugar, cocoa and natu-
ral vanilla, and Belgian chocolate giant Barry Callebaut has
introduced a Fairtrade range of confectionery products. Second,
government efforts towards combating Australia's high obesity
levels and the rising health-awareness trend among Australian
consumers have prompted domestic confectioners to increase
their production of healthier confectionery products. Of course,
premiumisation plays a part in fuelling the demand for healthier
alternatives as well.
Over the coming years, we would expect more confectioners
to join the trend towards producing healthier confectionery
products as they respond to industry and consumer demands.
These functional confectionery products typically carry higher
margins. The increase in demand, along with the trading up to
Fairtrade-certified products, will very likely instil considerable
dynamism in the confectionery sector to drive value sales growth.
Canned Food
• Canned food value sales are forecast to grow at a CAGR
of 3.1% in local currency terms between 2013 and 2018.
BMI continues to forecast modest growth in the Australian
canned food sub-sector, with value sales in local currency
expected to increase by a CAGR of 3.1% and volume sales
forecast to grow by a CAGR of only 0.7% through to 2018.
In the canned food sector, manufacturers have and will con-
tinue to face problems trying to sustain consumer interest in
processed and packaged food when confronted by growing
health-consciousness that encourages consumers to switch to
fresh produce. However, with manufacturers becoming increas-
ingly equipped to meet the seemingly conflicting consumer
demands for convenience and health, the continuous launch of
premium-priced healthy packaged food will drive value sales
to a greater extent than volume sales.
Drink
Alcoholic Drinks
• Alcoholic drink value sales are forecast to increase at a
compound annual growth rate (CAGR) of 2.4% in local
currency terms between 2013 and 2018.
• The wine sub-sector is expected to experience the strongest
demand growth through to 2018, with volume sales forecast
to increase at a CAGR of 1.9% over our forecast period.
Alcoholic drinks sales in Australia are expected to increase by
a CAGR of only 0.9% in volume terms, while value sales are
expected to register stronger growth of 2.4% in local currency
terms over our 2013-2018 forecast period. Given the relatively
mature and developed nature of the Australian beer sector, volume
sales of beer are projected to grow very modestly, by a CAGR of
0.5% between 2013 and 2018. The growing demand for spirits
and wines is largely driven by the premiumisation momentum
as consumers opt for higher-value alcoholic beverages; this will
translate into lower demand for more affordably priced beer.
The Australian wine market will be a major beneficiary of the
country's strong pickup in premiumisation momentum, given that
wine is still largely perceived as a luxury item. While the wine
sub-sector is unlikely to displace beer as the biggest contributor
to Australia's overall alcoholic drink sales over the medium term,
the considerably higher CAGR of 1.9% forecast for wine volume
sales over 2013 to 2018 means the segment is catching up.
Per capita beer consumption in Australia in pure alcohol con-
tent terms largely stagnated between 2006 and 2008 due to the
dynamics of the growth in premiumisation and an increasing
consumer demand for more flavour-driven alcoholic beverages.
Consumption per capita has been in a period of decline since
43Business Monitor International Ltd www.businessmonitor.com
key sectors
taBLe: Mass GrocerY retaiL saLes BY ForMat – HistoricaL Data & Forecasts, 2013-2018 2013e 2014f 2015f 2016f 2017f 2018f
Supermarkets sales, AUDbn 81.26 83.89 87.11 90.93 95.10 99.47
Discount stores sales, AUDbn 1.12 1.18 1.26 1.35 1.45 1.56
Convenience stores sales, AUDbn 6.72 7.02 7.40 7.85 8.34 8.85
Total mass grocery retail sales, AUDbn 89.09 92.10 95.77 100.13 104.89 109.87
e/f = BMI estimate/forecast. Source: BMI, Australian Bureau Of Statistics
2009. According to the Australian Bureau of Statistics, per capita
beer consumption in pure alcohol content stood at 4.23 litres in
2011, making this the weakest reading since 1946.
Premiumisation is another factor underpinning the structural shift
of consumption habits away from beer. As Australian consum-
ers climb up the income ranks, they are developing increasingly
sophisticated tastes for higher-value beverages such as spirits
and wines. Notably, the gap between per capita wine and beer
consumption in pure alcohol terms has narrowed over the past
few years, bearing out an accelerating premiumisation trend in
the Australian alcoholic drinks sector.
We believe that the shift of alcohol consumption away from beer
is structural rather than cyclical in nature and that the subdued
near-term domestic demand conditions are unlikely to derail the
long-term structural shift towards wines and spirits. Hot Drinks
Growth in the coffee sector will outperform growth in the tea
sector. Coffee sales are forecast to increase at a CAGR of 3.9%
in local currency terms between 2013 and 2018, compared with a
CAGR of 4.3% for tea sales. Sales of tea and coffee in Australia,
despite experiencing something of a boom a few years ago due
to the rapid emergence of the café culture and a new range of
hot beverages, have begun to level off slightly in recent years.
Nevertheless, we continue to expect moderate growth in the hot
drinks sector, and BMI forecasts a CAGR of 3.9% to 2018 in
the coffee sub-sector and 4.3% in the tea sub-sector.
Soft Drinks
• Soft drinks sales, in local currency value terms, are forecast
to increase at a CAGR of 2.6% between 2013 and 2018.
• Functional soft drink sales and bottled water sales are
forecast to experience the strongest growth rates among
the drinks sub-sectors, bearing out the impact of growing
health awareness on consumption habits.
Dynamic income growth and ensuing investments have instilled
dynamism in the Australian soft drinks industry, and tastes and
preferences have continued to calibrate towards higher value
segments. While domestic demand weakness would be very
likely lead to a lower appetite for higher-value non-carbonated
beverages in the near term, growing health consciousness and
the well-entrenched premiumisation trend in the domestic
beverage sector means that there is significant potential for
long-term outperformance of the non-carbonates sub-sector.
Over our forecast period, we believe the carbonates sector will
run out of steam and underperform the wider soft drinks industry
to 2018. On the other hand, opportunities for impressive growth
in non-carbonates are not likely to ease up any time soon thanks
to the country's solid premiumisation momentum and growing
health consciousness among Australian consumers.
Mass Grocery Retail
Overall mass grocery retail (MGR) sales are forecast to post a
compound annual growth rate (CAGR) of 4.1% in local currency
terms between 2013 and 2018. The discount store sub-sector
will be the growth outperformer, with a forecast CAGR of 6.9%
over the forecast period. BMI is holding to a cautious outlook
for the Australian consumer sector into 2014, as we foresee a
dip in private consumption, including retail spending, following
a fall in domestic property prices that leads to a loss of wealth.
Nonetheless, despite the Australian retail sector's short-term chal-
lenges, it cannot be denied that the industry remains a reasonably
attractive proposition for industry players, as reflected in our fore-
cast CAGR of 4.1% for MGR sales over 2013 to 2018. Domestic
industry players have continued to pour in investments to secure
their domestic foothold, and the rising competitive pressure from
new market entrants such as Costco will stimulate further industry
dynamism and drive headline MGR sales levels.
Through to 2018, the Australian discount sub-sector is set to
outperform, and BMI forecasts a CAGR of 6.3% in discount
sales. Discount supermarket retailer Aldi has contributed im-
pressively to growth over the review period thanks to the level
of competition and investment it stimulated and is set to remain
a key contributor over our forecast period.
Aldi's expansionary investment – the retailer plans to commit
more than AUD1bn (US$982.2mn) over three years – is one
of the key factors behind our bullish growth forecast for the
Australian discount sub-sector, as is the relatively low starting
point of discount store sales. Notably, the Australian discount
sector is expected to be a major beneficiary from near-term
domestic demand weakness, because consumers are likely to
switch to cheaper alternatives to supermarkets and convenience
stores in times of belt-tightening.
BMI predicts that the convenience store format is set to experi-
ence compound annual average growth of 5.7% to 2018, while
supermarkets will continue to take the lion's share of sales by
value, with a forecast CAGR of 4.1% to AUD99.0 in 2018.
44 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
45Business Monitor International Ltd www.businessmonitor.com
key sectors
other Key sectors
Latest Forecast DataBelow are the latest forecast tables for our other core key sectors:
taBLe: teLecoMs sector KeY inDicators2012 2013e 2014f 2015f 2016f 2017f 2018f
Number of Main Telephone Lines in Service (‘000) 10,175.3 9,870.0 9,573.9 9,095.2 8,640.5 8,208.5 7,798.0
Number of Main Telephone Lines in Service, % change y-o-y -3.0 -3.0 -3.0 -5.0 -5.0 -5.0 -5.0
Number of Main Telephone Lines/100 Inhabitants 44.1 42.3 40.5 38.0 35.7 33.5 31.4
Number of Cellular Mobile Phone Subscribers (‘000) 30,642.0 31,561.3 32,192.5 32,514.4 32,839.6 33,167.9 33,499.6
Number of Cellular Mobile Phone Subscribers, % change y-o-y 3.5 3.0 2.0 1.0 1.0 1.0 1.0
Number of Mobile Phone Subscribers/100 Inhabitants 132.9 135.2 136.2 135.9 135.6 135.2 134.9
Number of Mobile Phone Subscribers/100 Inhabitants, % change y-o-y 2.1 1.7 0.8 -0.2 -0.3 -0.2 -0.2
Number of Internet Users (‘000) 18,752.4 19,690.1 20,674.6 21,501.5 22,361.6 23,256.1 24,186.3
Number of Internet Users, % change y-o-y 5.0 5.0 5.0 4.0 4.0 4.0 4.0
Number of Internet Users/100 Inhabitants 81.4 84.4 87.5 89.9 92.3 94.8 97.4
Number of Internet Users/100 Inhabitants, % change y-o-y 3.6 3.7 3.7 2.7 2.7 2.7 2.7
Number of Broadband Internet Subscribers (‘000) 12,161.0 12,647.4 13,090.1 13,482.8 13,887.3 14,303.9 14,733.0
Number of Broadband Internet Subscribers, % change y-o-y 9.3 4.0 3.5 3.0 3.0 3.0 3.0
Source: National Statistics, Industry Sources, BMI
taBLe: DeFence anD securitY sector KeY inDicators2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
Defence expenditure, AUDmn 23,494.0 25,277.0 25,408.0 27,064.8 28,857.9 30,944.4 32,843.3 34,849.5
Defence expenditure, AUDmn % change y-o-y 1.3 7.6 0.5 6.5 6.6 7.2 6.1 6.1
Defence expenditure, % of GDP 1.6 1.7 1.6 1.7 1.7 1.7 1.7 1.7
Defence expenditure, AUD per capita of population 1,033.1 1,096.6 1,088.5 1,145.3 1,206.3 1,277.5 1,339.1 1,403.4
Defence expenditure, AUD per serviceman 411,814.2
Defence expenditure, US$mn, constant prices 18,350.2 19,864.0 19,518.1 18,084.2 17,141.3 17,113.7 17,345.6 17,936.9
Defence expenditure, US$mn, constant prices % change y-o-y -2.8 8.2 -1.7 -7.3 -5.2 -0.2 1.4 3.4
Defence expenditure, constant US$ per capita of population 806.9 861.8 836.2 765.3 716.5 706.5 707.2 722.3
Defence expenditure, constant US$ per serviceman 321,651.5
Source: National Statistics, Industry Sources, BMI
taBLe: pHarMa sector KeY inDicators2012 2013e 2014f 2015f 2016f 2017f 2018f
Pharmaceutical sales, US$bn 13.4 12.3 11.2 10.9 10.9 11.2 11.7
Pharmaceutical sales, US$bn, % chg y-o-y 4.6 -8.2 -9.6 -2.0 -0.4 2.4 4.8
Pharmaceutical sales, AUDbn 13.0 12.7 13.2 13.7 14.2 14.9 15.6
Pharmaceutical sales, AUDbn % change y-o-y 4.2 -1.8 3.4 3.7 4.2 4.5 4.8
health expenditure, us$bn 140.5 138.1 126.4 124.6 124.5 127.6 133.3
health expenditure, us$bn % change y-o-y 4.6 -1.7 -8.5 -1.4 -0.1 2.5 4.5
health expenditure, audbn 135.7 142.7 149.4 155.8 162.8 170.1 177.7
health expenditure, audbn % change y-o-y 4.3 5.1 4.7 4.3 4.5 4.5 4.5
Communicable, maternal, perinatal and nutritional conditions, DALY 57,965.4 57,447.4 57,180.0 57,163.3 57,397.6 57,883.2 58,620.4
Source: National Statistics, Industry Sources, BMI
46 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
This report is abstracted from BMI’s industry report series, which covers 22 sectors across global markets. Every quarter, we will provide tables
showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector. If you would like to order a full report, or find
out about BMI’s other 1,113 industry reports, please contact [email protected]
taBLe: oiL anD Gas sector KeY inDicators2012 2013e 2014f 2015f 2016f 2017f 2018f
Oil Proved Reserves, mn barrels 1,425.7 1,433.3 1,417.4 1,374.5 1,333.0 1,312.9 1,284.2
oil Production, 000b/d 519.1 525.6 519.9 511.7 510.4 509.2 508.2
Oil Consumption, 000b/d 1,126.1 1,136.2 1,146.4 1,156.8 1,167.2 1,177.7 1,188.3
Oil Refinery Capacity, 000b/d 737.5 667.5 605.1 543.0 543.0 543.0 543.0
Oil Net Exports, 000b/d -607.0 -610.6 -626.5 -645.1 -656.8 -668.4 -680.1
Oil Price, US$/bbl, OPEC Basket 109.5 105.9 101.8 100.0 99.0 97.0 96.0
Value of Net Oil Exports, US$bn (BMI base case) -28.2 -27.2 -27.6 -28.7 -28.1 -28.0 -27.3
Value of Net Hydrocarbons Exports, US$bn (BMI base case) -17.6 -16.6 -10.5 7.2 14.7 16.1 20.9
Value of Net Oil Exports at constant US$50/bbl – US$bn -12.7 -12.6 -13.2 -14.1 -13.9 -14.1 -13.8
Value of Net Oil Exports at constant US$100/bbl – US$mn -25.3 -25.2 -26.4 -28.1 -27.9 -28.3 -27.6
Value of Net Hydrocarbons Exports constant US$50/bbl – US$mn -7.8 -7.6 -4.8 3.9 7.7 8.6 11.3
Value of Net Hydrocarbons Exports constant US$100/bbl – US$mn -15.7 -15.1 -9.6 7.7 15.4 17.1 22.7
Total Net Hydrocarbons Exports, 000boe/d -273.6 -263.2 -44.9 596.8 842.8 904.0 1,062.3
Gas Proved reserves, tcm 0.8 1.2 1.4 1.4 1.4 1.4 1.5
Gas Production, bcm 48.2 49.8 64.1 103.2 118.9 123.8 134.3
Gas Consumption, bcm 28.9 29.6 30.4 31.1 31.9 32.5 33.2
lnG Price, us$/mn btu 16.3 15.7 15.1 14.9 14.7 14.4 14.3
Reserves/Production Ratio 2.7 2.7 2.7 2.7 2.6 2.6 2.5
Source: National Statistics, Industry Sources, BMI
taBLe: FreiGHt KeY inDicators2012 2013e 2014f 2015f 2016f 2017f 2018f
Port of Melbourne container throughput, TEU 2,579,097.0 2,510,000.0 2,704,034.6 2,789,239.2 2,873,520.3 2,951,736.6 3,030,725.8
Port of Melbourne container throughput, TEU, % y-o-y 7.9 -2.7 7.7 3.2 3.0 2.7 2.7
Air Freight Tonnes (000) 913.0 934.0 958.3 980.3 1,004.8 1,027.9 1,054.7
Air Freight Tonnes % Change y-o-y 3.5 2.3 2.6 2.3 2.5 2.3 2.6
Rail Freight Tonnes (000) 817,591.0 829,854.8 844,466.5 862,091.3 883,255.4 907,567.4 932,375.6
Rail Freight Tonnes % Change y-o-y 4.5 1.5 1.8 2.1 2.5 2.8 2.7
Road Freight Tonnes (000) 2,307,442.2 2,372,050.6 2,431,351.8 2,496,998.3 2,571,908.3 2,651,637.4 2,736,489.8
Road Freight Tonnes % Change y-o-y 2.1 2.8 2.5 2.7 3.0 3.1 3.2
Source: BMI
taBLe: inFrastructure sector KeY inDicators2011 2012 2013e 2014f 2015f 2016f 2017f 2018f
Construction industry value, AUDbn 107.5 112.7 116.1 122.4 129.8 138.7 148.0 158.0
Construction industry value, US$bn 110.9 116.7 114.4 103.6 103.9 106.1 111.0 118.5
Construction industry, real growth, % y-o-y 21.0 5.2 -2.0 -9.5 0.3 2.1 4.7 6.7
Construction industry value, % GDP 7.4 7.6 7.4 7.5 7.6 7.7 7.8 7.9
Source: National Statistics, Industry Sources, BMI
47Business Monitor International Ltd www.businessmonitor.com
Chapter 6: BMi Global assumptions
Global outlook
Fairly Benign prognosis... With risksBroadly speaking, our strategic macro outlook for 2014 is fairly
benign. We believe that the global economy is in a sweet spot
of accelerating growth alongside modest inflationary pressure,
reflected in our 3.2% global GDP growth forecast for 2014 (up
from an estimated 2.6% in 2013) and our 3.2% inflation pro-
jection for 2014 (marginally up from 3.1% the previous year).
Developed markets, particularly in Europe, will enjoy a stronger
and less turbulent recovery this year, which will buoy demand
for previously underperforming stock markets and go some way
to mollify political stresses. Although our core forecasts indicate
subdued inflation, we warn that developed markets, particularly
the eurozone, are vulnerable to a deflationary shock. Economic
growth is still below potential, and monetary and fiscal ammuni-
tion has already been heavily depleted. In some cases, further
deleveraging is required.
The outlook for emerging markets (EMs) is more of a mixed
bag. In most cases we expect economic recoveries to shift up a
gear, but growth will continue to look fairly lacklustre compared
with the blistering pace set in recent years. Policymakers will
have to grapple with persistent demand weakness in developed
markets, which has undermined the old growth models of the
emerging world. Where market reforms were put on the back-
burner during the cyclical boom, we expect the facade built up
around many credit-fuelled EMs to continue crumbling. For
the most part, this is a story of emerging markets normalising
following a period of above-trend growth. However, there are
several precarious cases – namely Turkey, Argentina and
Brazil – that will face more acute market pressure as external
taBLe: GLoBaL assuMptions2013e 2014f 2015f 2016f 2017f 2018f
real GDp Growth (%)
us 1.8 2.8 2.6 2.4 2.4 2.4
eurozone -0.4 1.1 1.3 1.3 1.5 1.5
Japan 2.4 1.3 1.1 0.9 1.0 0.9
china 7.6 7.1 6.0 5.8 5.8 5.8
World 2.6 3.2 3.3 3.3 3.4 3.4
Consumer Inflation (ave)
us 1.5 1.7 2.1 2.1 2.1 2.1
eurozone 1.7 1.5 1.6 1.8 1.9 1.9
Japan 0.5 1.5 1.9 2.1 2.4 2.5
china 2.6 2.6 2.8 2.7 2.7 2.7
World 3.1 3.2 3.3 3.2 3.2 3.1
interest rates (eop)
Fed Funds rate 0.00 0.00 0.75 2.00 3.00 3.50
ECB Refinancing Rate 0.25 0.25 0.25 0.25 0.50 1.50
Japan overnight call rate 0.10 0.10 0.10 0.10 0.10 0.10
exchange rates (ave)
us$/eur 1.32 1.27 1.23 1.20 1.20 1.20
JpY/us$ 98.00 102.00 102.00 102.00 102.00 102.00
cnY/us$ 6.22 6.16 6.23 6.25 6.25 6.25
oil prices (ave)
opec Basket (us$/bbl) 105.87 101.75 100.00 99.00 97.00 96.00
Brent crude (us$/bbl) 108.70 104.75 102.00 101.00 99.00 99.00
e/f = estimate/forecast. Source: BMI
48 Business Monitor International Ltdwww.businessmonitor.com
AustrAliA Q2 2014
taBLe: DeVeLopeD states, reaL GDp GroWtH, %2013e 2014f 2015f 2016f
Developed states aggregate Growth 1.3 2.0 2.1 2.1
G7 1.4 2.1 2.0 1.9
Eurozone -0.4 1.1 1.3 1.3
eu-27 0.0 1.3 1.6 1.7
selected Developed states
Australia 2.4 2.0 2.5 2.8
Austria 0.5 1.5 1.9 2.0
Belgium 0.3 1.2 1.6 1.9
canada 1.7 2.1 2.3 2.3
Czech Republic -0.9 1.3 2.7 3.1
denmark 0.4 1.4 1.6 1.7
finland -0.8 1.1 1.6 2.0
france 0.2 0.7 1.1 0.9
Germany 0.5 1.9 1.5 1.4
hong kong 2.8 3.0 3.7 3.8
ireland 0.3 2.1 2.4 2.8
italy -1.8 0.4 0.7 0.8
Japan 2.4 1.3 1.1 0.9
Netherlands -1.0 0.5 1.5 1.8
norway 0.9 1.9 2.7 2.4
Portugal -3.0 -0.5 0.9 1.0
singapore 3.7 3.2 3.2 3.3
south korea 2.5 3.0 4.1 4.6
spain -1.2 0.7 1.1 1.3
sweden 0.8 2.4 2.8 2.5
Switzerland 2.1 2.0 1.7 1.4
taiwan 2.1 3.0 4.1 4.1
united kingdom 1.5 2.1 2.2 2.5
United States of America 1.8 2.8 2.6 2.4
e/f = estimate/forecast. Source: BMI
taBLe: BMi Versus BLooMBerG consensus reaL GDp GroWtH Forecasts, %us eurozone Japan Brazil china russia india
2014 Bloomberg Consensus 2.8 1.0 1.6 2.1 7.5 2.4 4.8
BMI 2.8 1.1 1.3 2.4 7.1 2.1 5.6
2015 Bloomberg Consensus 3.0 1.4 1.2 2.6 7.2 2.6 5.5
BMI 2.6 1.3 1.1 2.8 6.0 2.9 6.2
Source: BMI, Bloomberg
financing vulnerabilities clash with wayward domestic policies
and the prospect of Fed tapering.
The continued repayment of funds borrowed by eurozone banks
during the two long-term refinancing operation rounds has
resulted in passive monetary tightening in the eurozone. When
considered alongside a stronger currency, monetary conditions
are now far too tight for the eurozone periphery and leave the
bloc vulnerable to a deflationary shock. We have consequently
revised down our European Central Bank refinancing rate fore-
casts for 2015, 2016 and 2017.
Developed statesOur developed states real GDP growth estimate for 2013 is
1.3%, and we forecast this to rise to 2.0% and 2.1% in 2014
and 2015 respectively.
We have downgraded our 2014 real GDP growth forecast for
Canada to 2.1% from 2.3%, and for 2015 to 2.3% from 2.5%.
Though these projections are up from estimated real GDP growth
49Business Monitor International Ltd www.businessmonitor.com
bmi Global assumptions
taBLe: eMerGinG MarKets, reaL GDp GroWtH, %2013e 2014f 2015f 2016f
emerging Markets aggregate Growth 4.6 4.8 5.0 4.8
Latin america 2.6 3.1 3.4 3.7
argentina 3.2 2.9 3.5 4.4
Brazil 2.3 2.4 2.8 3.1
Mexico 1.5 3.5 3.8 3.9
Middle east and north africa 2.7 3.9 4.1 3.8
saudi arabia 5.1 3.6 4.3 3.3
uae 6.2 4.1 3.4 3.6
egypt 2.2 1.9 2.7 4.2
sub-saharan africa 5.1 5.4 5.6 5.7
South Africa 1.8 2.5 2.9 3.2
nigeria 6.7 7.0 6.9 6.9
emerging asia 6.8 6.5 5.9 5.8
china 7.6 7.1 6.0 5.8
india* 5.0 5.6 6.2 6.5
Indonesia 5.7 5.4 6.5 6.3
Malaysia 4.6 4.4 4.2 4.1
Philippines 6.9 6.3 6.0 5.1
thailand 3.6 3.8 4.4 4.2
emerging europe 2.0 2.5 3.2 3.4
Russia 1.4 2.1 2.9 3.0
turkey 3.3 2.6 3.4 3.8
hungary 0.8 1.7 1.9 2.5
romania 2.6 2.8 3.3 3.5
Poland 1.4 2.6 2.8 3.7
e/f = estimate/forecast; *Fiscal years ending March 31 (2013=2012/13). Source: BMI
of 1.7% in 2013, they are lower than the Bloomberg consensus
estimates of 2.3% and 2.5% for 2014 and 2015 respectively.
Conversely, we have revised up our 2013 growth estimate for
Finland and now believe real GDP contracted by 0.8%, from a
previous forecast for a 1.7% contraction. Growth will acceler-
ate in 2014 to 1.1%, triggered not by any particularly positive
developments in the Finnish economy, but rather our belief that
eurozone growth is finally turning a corner.
emerging MarketsWe forecast a modest acceleration in emerging markets eco-
nomic activity, with real GDP growth estimated at 4.6% in 2013
and forecast at 4.8% in 2014 and 5.0% in 2015. We have made
only a few forecast changes for major EM economies since our
last monthly update. While we have adjusted our 2013 real GDP
estimate for Mexico downward from 1.6% to 1.5% as a result
of revisions to official data, we have increased our 2014 growth
outlook amid signs that external and domestic factors continue
to improve. We now forecast real GDP growth to accelerate to
3.5% this year, up from the 3.3% previously forecast.
In Asia, we have upgraded our 2014 and 2015 real GDP forecasts
to 6.5% and 5.9% respectively, from 6.0% and 5.4% previously.
Informing our view is the fact that the Philippines remains in
the early stages of a credit boom, suggesting that there is plenty
of room left to run.
Bloomberg consensus forecast for US real GDP growth in 2014
has risen from 2.6% to 2.8%, in line with our projection. We
are well below consensus for Chinese, Japanese and Russian
real GDP growth in 2014, while above consensus for India.
analyst: Esther Ye Yansieditor: Stuart Allsoppsub-editor: Mia kilroysubscriptions Manager: Chamu DissanayakaMarketing Manager: Sarah Sutcliffeproduction: umra khanpublishers: Richard Londesborough, Jonathan Feroze
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