The Australian economy is estimated to have achieved its best performance since 2007 after enjoying a 3.5 percent expansion in 2012. Downside risks to growth appear to have diminished, but the economy is not out of the woods yet; a worsening debt crisis in Europe could have significant ramifications for Australia. While the country’s direct export exposure to Europe is limited, Australia depends on credit from European banks, which could dry up in the event of a crisis, to meet its financing requirements. On the other hand, the Chinese economy seems to have turned a corner, and the demand for resources from China and other parts of Asia will fuel growth in Australia’s mining sector. Moreover, Japan’s new government has embarked upon an aggressive policy agenda, and the US economy has, so far, avoided a severe fiscal contraction. These factors bode well for Australia’s growth prospects. Australia’s GDP is expected to expand by 3 percent in 2013 on the back of higher capital investments, strong output growth in the mining sector, and increased exports.
Australia’s housing sector is staging a recovery, but it may be too early to suggest a turnaround. An uptick in demand has pushed average house prices in Australia’s capital cities up by 1.6 percent in Q4 2012. The housing sector seems to have benefitted from the central bank’s rate cuts, which have made housing more affordable and added to the confidence of homebuyers. Furthermore, fewer Australians are now defaulting on their mortgage payments as a result of lower interest rates and slower growth in house prices. However, housing approval data showed that the number of approved dwellings fell 4.4 percent in December after rising 3.4 percent in the previous month. With housing prices moving higher, investments in this sector will likely increase in the coming months and prices are expected to inch up gradually.
Meanwhile, contrary to expectations, retail sales fell by 0.2 percent in December. Retail sales have been weak since October 2012, but the December reading is particularly disconcerting against the backdrop of a mild recovery in the housing sector. The holiday season and the central bank’s rate cut did not translate into higher consumer spending. While the weakness in the overall level of retail sales is disappointing, sectors such as footwear, clothing, and electronics posted small gains. Furthermore, new vehicle sales made a strong start in 2013, up 11.3 percent in January over the previous year despite a sharp drop in purchases by the federal and state governments. Even though some indicators suggest that private consumption spending is picking up, pre-crisis levels of consumption are unlikely in the near term. Australian consumers are heavily indebted and have increased their saving rate in the aftermath of the financial crisis. Household savings averaged 10.3 percent on a seasonally adjusted basis between January and September 2012 compared to an average of 3.3 percent in the 2004–2008 period. Moreover, credit availability is relatively constrained despite the central bank’s periodic rate cuts.
Australia’s housing sector is staging a recovery, but it may be too early to suggest a turnaround. An uptick in demand has pushed average house prices in Australia’s capital cities up by 1.6 percent in Q4 2012.
The Reserve Bank of Australia (RBA) cut the cash rate by 1.75 percent between November 2011 and December 2012. In its monetary policy meeting in February 2012, the RBA kept the cash rate unchanged at 3 percent. Improving global outlook and an uptick in the housing sector support the central bank’s stance, and the full impact of monetary easing undertaken in 2012 is yet to play out. Meanwhile, the Consumer Price Index (CPI) rose 0.2 percent in Q4 2012, compared with a rise of 1.4 percent in the third quarter. Overall, the CPI rose 2.2 percent in 2012 and is within the RBA’s target level. A slight increase in unemployment, limited upward pressure on labor costs, and modest consumer demand are likely to keep a lid on inflation in the coming months. However, if growth falters, the RBA has the flexibility to ease policy.