KPMG releases latest Quarterly Economic Outlook

KPMG releases latest Quarterly Economic Outlook

Brexit casts shadow on global economy; Australian unemployment rate to remain at 5-6 percent.

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The Australian economy will grow at 2.9 percent in 2016, the latest KPMG Quarterly Economic Outlook forecasts.

KPMG also predicts global growth will be 3.0 percent and 3.3 percent for 2016 and 2017 respectively, slightly lower than the IMF forecasts of 3.1 percent and 3.4 percent. The report argues that the Brexit vote has increased global uncertainty and impeded the fledgling recovery in the world economy.

Brendan Rynne, KPMG Australia Chief Economist, said: “Our forecast of 2.9 percent domestic growth suggests relatively soft growth for the June 2016 quarter. Despite the end of the resources boom, it is the export sector which is still supporting Australia’s growth, with mining production generating economic benefits from a volume, and slight price, perspective, and services also contributing positively to our trade balance.”

Other key points

Other key points from the report:

  • Declining business investment continues to be a drag on economic growth, and is anticipated to do so well into FY18.
  • State Government debt, including unfunded superannuation liabilities, is growing faster than either Commonwealth Government or Local Government debt.
  • While the economy is improving, the report observes that employment growth is not occurring at a rate strong enough to make a major impact on Australia’s unemployment levels. KPMG anticipates unemployment rates will settle between mid-5 percent and 6 percent for the medium term.
  • In addition to a ‘sticky’ unemployment rate, there also remains a significant number of people who are working less than they would like. The under-utilisation rate of employed people is now at its highest level since the ABS survey began in 1978. However, there is a marked skew in these results, with young workers aged 16-24 years recording under-utilisation between 2 to 3 times higher than older workers.

Brendan Rynne said: ”The Australian labour market has been much weaker in the first half of 2016, with only 43,000 new jobs generated in the six months to June, and the number of full time employed people declined by nearly 19,000. This is where policymakers need to focus their attention.”

He added: “Globally, economic growth is subdued, and now it looks like 2016 will record the lowest level of growth since the GFC. We were starting to see signs of fragile improvement in emerging markets and developing economies, and Brazil and Russia were beginning to return to positive growth sooner than previously expected. But the spectre of the UK leaving the European Union has now increased global uncertainty.”

KPMG’s Quarterly Economic Outlook always incorporates a ‘what-if scenario’ to assess its impact on the world, and particularly the Australian economy. The August edition analyses what could happen if global investors lose confidence in the European economy and in the effectiveness of monetary policy within the EU. The report broadly follows the methodology proposed by the European Banking Authority to stress test banks within the EU.

The outcome was a 1.5 percent hit to world trade and a severe impact on the Eurozone – EU GDP would contract by -0.4 percent and -0.6 percent in absolute terms immediately after the shock occurs. Australia would not escape from the impact of Europe melting down, and although our GDP growth would remain positive over the forecast period, it would be lower by -0.1 percent, -0.6 percent and -0.4 percent in each of FY17, FY18 and FY19.

Brendan Rynne said: “While this is only a ‘what if’ scenario, it is not beyond the bounds of possibility given the Brexit uncertainty, and the outcomes of this analysis contain an important lesson for our own Central Bank. Namely, that Australia must maintain some headroom in its official cash rate if we get hit with a global/European downturn. By not having our cash rate at or near 0 percent we then have the capacity to drop rates in order to minimise any shock to our domestic economy.

“The good news is that the Australian economy continues to grow at rates better than most developed economies. But by historical standards it is subdued, and KPMG would argue it needs targeted investment in infrastructure projects funded through virtually zero real cost government bonds. Reducing existing inefficient and ineffective government expenditure to tackle the deficit must also be a priority.”

Further information

Ian Welch
Senior Communications Manager, KPMG
T: 02 9335 7765 / 0400 818 891
E: iwelch@kpmg.com.au

Quarterly Economic Outlook – August 2016

KPMG’s Quarterly Economic Outlook for August 2016 provides forecasts on the Australian and global economies.

 
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