" We expect 2016 will be a record year for new house construction."
Warren Hogan, ANZ Chief Economist
But with so much volatility in global financial markets already this year, it's worthwhile to remind ourselves just how well the economy is doing despite the dark cloudson the international horizon.
The most important economic statistic in any economy is its unemployment rate. A year ago Australia's unemployment was at 6.4 per cent, compared with 5.8 per cent today. Last year the country generated roughly 25,000 jobs a month, increasing employment by 301,000, making 2015 second only to 2006 as the best year for job creation in Australia this century.
ANZ's job ads series measures hiring intentions. That too has been rising, signalling continued demand for labour in early 2016. Despite ongoing job losses in mining and parts of the manufacturing sector, the rest of the economy is growing by enough.
Not only to create enough jobs to cover the losses in those sectors but also to provide for newcomers to the workforce - and even a few extra jobs for people who don't have one.
It still might still be a bit high at 5.8 per cent but it's moving in the right direction. While the unemployment rate is the most important economic statistic, it's not a forward looking one.
It doesn't tell us much about the future other than to say the economy is gaining some momentum. It's what economists call a lagging indicator.
What the job numbers confirm is the economy is now successfully making the transition to non-mining drivers of growth. The new driver of growth in the Australian economy is housing.
Rising house prices are good for confidence, borrowing capacity and consumer spending. This has been crucial for underpinning key retail service industries and job creation.
Equally important has been the kick to jobs and economic activity from house building. At ANZ, we expect 2016 will be a record year for new house construction with commencements likely to be 220,000 compared to an average of just 150,000 during the decade long mining boom.
It cannot be underestimated how important the upswing in residential construction has been to offsetting the negative effects of the mining investment downturn on the economy.
Although housing construction activity should remain elevated for the next few years amid much pent up demand, there is little prospect of further growth in this sector.
Building approvals have peaked. Housing affordability has fallen and financing conditions have tightened up in the past year. For the domestic economy, it's in this sector where the blue skies could be turning grey.
We have come to rely on growth in housing activity and rising house prices to support the economy against the downswing of mining investment in recent years.
Beyond mining and construction there are some good signs. Infrastructure spending is growing, more broadly commercial construction is doing well, education and tourism are benefitting from the low Australian dollar and new firms in new industries adapting new technologies to commercial ends are sprouting up across the country.
Are these sectors enough to keep the overall economy on an even keel as mining and residential construction soften? That is the big question for 2016.
We also face some large disparities in economic performance across the country. Western Australia's economy faces great challenges in 2016 as the residential construction cycle joins the mining investment cycle in full down swing.There is little chance of other industries being able to offset these powerful forces when mining in particular is such a big part of the WA economy.
At the other end of the spectrum is NSW, which is one of the strongest individual economies in the world. NSW is 'on the move', to steal a Victorian government slogan from the 1990s.
If the Reserve Bank of Australia was setting interest rates for the NSW economy in isolation, we would already be 50 to 100 basis points into a tightening cycle by now.
Queensland and Tasmania are doing well; South Australia's prospects are improving slowly despite the severe problems around key manufacturing industries.
The two Territories should be fine. It's really just WA bearing concern after the mining boom took WA incomes per capita to the highest of just about anywhere in the world.
One thing is reasonably certain. The strong 4-per-cent-plus types of growth rates seen many times in this country in the past 25 years are unlikely to return any time soon.
We will be doing well to achieve the 2.5 per cent to 3 per cent rate of growth required to keep unemployment steady.
This means the RBA's interest rate is unlikely to be very far from the current level of 2 per cent over the next few years. Indeed, the risk is the RBA will need to provide a bit more support to the economy via lower interest rates if housing does indeed falter through the course of the year.
But that is good news for Australia. Unlike many countries around the world, we still have some economic policy ammunition tucked away.
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
21 Jan 2016
20 Jan 2016
20 Jan 2016