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Steve Miller, who heads the Australian Fixed Income team and is a BlackRock Investment Institute (BII) strategist, has provided a deeper dive into what is expected for Australia in 2016:
As is well known the challenge in Australia remains one of transitioning growth leadership from mining investment to other sources of activity growth. Big prospective falls in mining investment are a given and there are key downside risks to housing and household spending. There is nevertheless the prospect that net exports continue to contribute positively to growth, reflecting prior investment in mining and some renewed strength in those parts of the services area sensitive to the exchange rate.
The housing sector is a key risk: it has been the engine of private final domestic demand (either directly or indirectly through household spending) but in our view is somewhat fragile. The regulators have implemented a number of macro-prudential measures which have seen the banks undertake out-of-cycle mortgage interest rate increases at a time when the housing upswing looks mature. The combined impact of these events is expected to be reflected, at some stage, in both house price data and construction data (and again indirectly on household spending). It is in this context we see some risk of an outsized impact on housing and household spending prompting even further weakness in private final demand at the same time as the challenges facing the Chinese economy are mounting.
Given our concerns surrounding downside risks to activity growth, we expect that the RBA will cut rates again in 2016.
We judge the risks on the AUD to be weighted toward the downside. It appears to have been impervious to recent weakness in commodity prices. The AUD view reflects our assessment regarding headwinds to growth; the likely course of the terms of trade (reflecting declining prices for Australia’s commodity exports); a possible further RBA rate cut; and an expectation that the US Federal Reserve will likely raise the policy rate in December.
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