Economic Forecasts - Dec. 2015-Jan. 2016

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THE AUSTRALIAN ECONOMY:

CURRENT STATE OF PLAY & OUTLOOK

BIANNUAL REVIEW OF MACROECONOMIC FORECASTS

ISSUED: 12th JANUARY 2016

All historical data used in this report are the latest available as at 14th January 2016. External

forecast data from the IMF, OECD, commercial banks et al are the latest available.

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2 MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 |

SUMMARY OF KEY ECONOMIC FORECASTS

Source: Australian Bureau of Statistics; RBA; OECD, EIU; IMF; various commercial banks forecasts; Economics@Telstra.

The latest internal forecasts for key macroeconomic variables are

compared and contrasted with the current market consensus view:

2015-16e 2016-17f 2017-18f 2018-19f

Telstra 2.6% 2.9% 3.1% 2.9%

Market 2.3%-2.7% 2.7%-3.2% - -

Real GDP Growth: Under the auspices of low interest rates and a low A$,

modest improvement in the growth outlook is expected as economic

rebalancing progresses. Risks to growth now more evenly balanced.

• Export-led economic growth forecast to continue over 2016 and 2017 while

growth in domestic demand expected to remain subdued.

• The current pace of expansion in the non-mining economy is encouraging but

likely to remain sluggish during the early part of the forecast horizon.

• A softer commodity market outlook, high under-employment, and constrained

spending capacity by consumers and businesses expected to weigh on the

short-term growth outlook.

2015-16e 2016-17f 2017-18f 2018-19f

Telstra 6.1% 5.9% 5.7% 5.6%

Market 5.8%-6.4% 5.6%-6.1% - -

Unemployment rate: Surprising resilience in employment growth over 2015

masks excess capacity reflected in high full-time un/N. If the 2016 growth

outlook unfolds as expected, the un/N rate is likely to peak at a lower level.

2015-16e 2016-17f 2017-18f 2018-19f

Telstra 2.2% 2.5% 2.6% 2.6%

Market 1.8%-2.8% 2.3%-2.7% - -

CPI Inflation: With labour market slack expected to persist over the coming

year given soft demand conditions, CPI inflation should remain subdued due to

absence of ‘demand-pull’ price pressures. But upward risks posed by lower A$.

MYEFO=Mid-Year Economic &

Fiscal Outlook (Dec. 2015)

2.6%2.9%

3.1%2.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f)

Real GDP Growth(Financial Year Average)

Telstra forecasts (as at Dec. 2015) Federal Budget (MYEFO) 2015

Long-term trend post-1990 Current market consensus

2.2%

2.5% 2.6% 2.6%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f)

Consumer Price Index Outlook(Financial Year Average)

Telstra forecasts (as at Dec. 2015) Federal Budget (MYEFO) 2015*

Long-term trend (1990-current) Current market consensus

* Budget forecast through-

the-year to June quarter.

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KEY CHANGES IN GDP & CPI FORECASTS

The major revisions to the growth outlook effected in this forecast update (relative to previous) are to:

1. Decrease business capex in line with the sharp downturn in the mining sector as growth in the Chinese economy moderates sustaining sharply lower

commodity prices;

2. Frontload some public spending including by states; and

3. Modestly lower near-term export growth forecasts even though the ramp-up in mining production and output will sustain elevated levels of resource exports.

Consumer spending forecasts largely unchanged. The outlook for consumer spending is influenced by the evolution of fiscal and monetary policy; a more resilient

performing labour market than previously expected; improved household balance sheets given focus on debt consolidation and higher asset prices; and moderating

support from housing construction (as activity slows). Weak wage growth, high savings & subdued confidence key factors weighing on the spending outlook in 2016.

With respect to the outlook for inflation, the downgrade to the 2015-16 (and to a lesser extent 2016-17) outlook largely reflects:

1. Expectations that the economy will continue to operate with a non-trivial degree of spare capacity keeping growth in labour costs low; and

2. Sustained low demand-pull price pressures in the short-term given the patchwork nature of domestic growth. But structural cost pressures in health, education

and utilities likely to keep cost-push inflation 'sticky‘ which, combined with a lower US$/A$, will bias overall inflation risks upwards.

While domestic demand conditions are expected to gradually improve and strengthen in 2016 and 2017, it is likely that overall inflationary pressures will see the

headline rate oscillate around the middle of the RBA target range (2%-3%) over the medium-term.

-0.1%

0.1%

-0.3%

-0.1%

0.0%

0.1%

-0.2%

0.2%

0.0%

0.1%

0.0%

0.1%

-0.4%

-0.3%

-0.2%

-0.1%

0.0%

0.1%

0.2%

Real GDP Consumer Spending CPI Inflation Unemployment Rate

Points

Dec. 2015 Forecasts: Key Revisions Since June 2015(Year average % point change)

% point chg in 2015-16 expectation

% point chg in 2016-17 forecast

% point chg in 2017-18 forecast

2015-16 & 2016-17 Economic Outlook

1. The short-term growth outlook effectively unchanged reflecting drag on growth from lower business capex and lack of durable offset by other parts of the economy such as household spending and non-mining business capex. Exports a key growth driver.

2. The unemployment rate now expected to peak at slightly lower level (~6.1% in 2016) but remain close to this level for longer than previously thought. A key downside risk to growth in wages, household disposable income and consumption.

3. Subdued domestic demand conditions sustaining low inflation in the short-term. Supports RBA 'low for longer' rate scenario.

Short-term inflation forecasts downgraded given extent of global disinflation risk;

low commodity prices; weak wage growth; and subdued domestic demand.

Forecast revisions 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f)

Real GDP June 2015 2.7% 2.9% 3.1% 3.0%

December 2015 2.6% 2.9% 3.1% 2.9%

% pt change -0.1% 0.0% 0.0% -0.1%

Consumer June 2015 2.7% 2.9% 3.0% 3.0%

Spending December 2015 2.8% 3.0% 3.1% 2.9%

% pt change 0.1% 0.1% 0.1% -0.1%

Business June 2015 -7.1% -2.3% 3.8% 4.7%

Capex December 2015 -8.9% -2.5% 2.1% 5.2%

% pt change -1.8% -0.2% -1.7% 0.5%

Exports June 2015 7.7% 7.2% 6.8% 5.2%

December 2015 6.4% 7.3% 5.6% 4.3%

% pt change -1.3% 0.1% -1.2% -0.9%

Employment June 2015 1.5% 1.9% 1.7% 1.6%

December 2015 1.9% 1.8% 1.8% 1.7%

% pt change 0.4% -0.1% 0.1% 0.1%

Unemployment June 2015 6.2% 5.7% 5.6% 5.6%

Rate (period end) December 2015 6.1% 5.9% 5.7% 5.6%

% pt change -0.1% 0.2% 0.1% 0.0%

CPI (FY average) June 2015 2.5% 2.7% 2.6% 2.6%

December 2015 2.2% 2.5% 2.6% 2.6%

% pt change -0.3% -0.2% 0.0% 0.0%

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KEY CHANGES IN OTHER ECONOMIC VARIABLES

Reflecting labour market slack, rising demand for labour is likely to be met by increased

hours worked suggesting that the translation of output and employment growth into wage

inflation is likely to remain muted; at least in the short-term. Consequently wage growth is

likely to persist around decade lows in 2016-17.

Factors limiting consumer demand in the short-term include the likely gradual pick-up in

employment as labour demand is initially met by increased hours worked (i.e. converting

part-time employees to full-time where appropriate) which in turn is constraining wage

growth and spending capacity; the savings ratio likely to sustain above pre-GFC levels

reflecting ongoing cautious household behaviour and balance sheet repair; and only soft

household debt uptake (especially relative to pre-GFC and despite low interest rates).

Latest macro

forecasts for 2016-17

broadly in line with

market consensus

6.1%5.9% 5.7% 5.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f)

Employment Growth & Unemployment Rate(Financial Year Average)

Unemployment rate

Employment growth

Long-term trend in N growth

3.0%2.8%

-2.5%

1.9%

7.3%

3.3%2.9% 2.5%

Consumer

Spending

Housing

Investment

Business

Capex

Domestic

Demand

Exports Imports Real GDP CPI Inflation

Latest Economic Forecasts: Key Components of

GDP & CPI Inflation in 2016-17(FY Average % Change; Market forecasts as at Dec. 2015)

Low market forecast Average forecast (Consensus)

High market forecast Telstra forecast

0%

1%

2%

3%

4%

5%

6%

7%

8%

2011-12 2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f)

Consumer Spending, Household Income

& Unemployment Rate

Real Consumer Spending

Nominal Household Disposable Income

Unemployment Rate

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GLOBAL ECONOMIC TRENDS & OUTLOOK

Global growth conditions continue to be challenging and projected to remain modest relative to pre-GFC trends. The recent moderate pace of growth

in the global economy is likely to continue in 2016. Differential prospects for moderate growth persist across advanced and developing economies. The

short-term growth outlook is also weighed down by intensifying geo-political risks in the Middle East, and socio-economic risks such as the European

refugee crisis and elevated terrorism threat.

Sharply lower global oil prices, the downturn in key commodity markets sustaining low commodity prices, and factory-gate deflation in China are

conspiring with subdued demand conditions in keeping global inflation restrained. Cyclically benign and below-target inflation among major advanced

economies as well as China underscores expectation that monetary policy will remain accommodative for a considerable time even as growth recovers.

The weaker outlook for emerging market growth especially in Asia has resulted in the International Monetary Fund (IMF) lowering its macro forecasts

for global growth. As per its latest October 2015 update, the IMF expects global GDP to expand by 3.1% in 2015 (down from a July forecast of 3.3%)

before accelerating to around 3.6% in 2016 (down from a July forecast of 3.8%). Importantly the IMF now views as ‘more pronounced’ the downside risks

to the global growth outlook compared to its assessment in July. Further, it believes that the return to robust and synchronised growth ‘remains elusive’.

The IMF expects the US economy to post growth of 2.6% in 2015 and 2.8% in 2016 (up 0.1% point and down 0.2% points on the July forecast,

respectively) supported by low energy prices, an improved housing market, labour market strength and less fiscal drag.

With Asian growth cooling in 2015, growth is expected to exhibit a modest rebound in 2016 and 2017 driven by gains in domestic and external demand

(esp. as US growth improves). Growth in developing Asia and the ASEAN-5 should accelerate to around 4.5% and 4.9%, respectively in 2016.

Against the backdrop of ‘low-flation’ and downside risks to global economic growth, a non-synchronised outlook for global monetary policy remains

firmly in place (i.e., US monetary policy being gradually and cautiously normalised over coming years while asset buying programs (or quantitative easing

(QE)) to be maintained in Japan and the Euro zone in 2016).

Divergent monetary policy in the US and other major economies likely to underscore a high degree of volatility in financial markets over the short-

term forecast horizon. In turn, this will impact emerging market economies via uncertainty and volatility in international capital flows. In addition, emerging

market currency depreciation and FX volatility (as the US$ strengthens) poses upside risk to inflation and compromises growth in these economies.

Source: International Monetary Fund (IMF); charts produced by Economics@Telstra.

3.4 3.1 3.6 3.8

2014 2015e 2016f 2017f

Global Economy

1.8 2.0 2.2 2.2

2014 2015e 2016f 2017f

Advanced Economies

4.6 4.0 4.5 4.9

2014 2015e 2016f 2017f

Emerging Market Economies

Annual GDP

Growth Rates

The IMF expects robust &

synchronised growth b/w

advanced & emerging

market economies to

‘remain elusive’.

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GLOBAL ECONOMIC TRENDS & OUTLOOK (cont.)

China growth outlook unchanged

but IMF remains concerned about

downside risks as leverage-fuelled

asset market excesses unwind.

US growth forecasts favourable

tempered by exposure to softer

Asian growth outlook.

Global growth outlook weighed

down by weaker emerging market

growth. A robust and synchronised

growth recovery remains ‘elusive’.

ASEAN-5 growth outlook resilient

impacted by weaker terms-of-trade.

Real GDP Growth 2014 2015f 2016f

World Output 3.4% 3.1% 3.6%

Change from previous forecasts (July 2015) - 0.2% - 0.2%

Advanced Economies 1.8% 2.0% 2.2%


United States 2.4% 2.6% 2.8%

Euro Area 0.9% 1.5% 1.6%

Japan -0.1% 0.6% 1.0%

United Kingdom 3.0% 2.5% 2.2%

Australia 2.7% 2.4% 2.9%


Emerging & Developing Economies 4.6% 4.0% 4.5%


Emerging & Developing Asia 6.8% 6.5% 6.4%

China 7.3% 6.8% 6.3%

Change from previous forecasts (July 2015) 0.0% 0.0%

India 7.3% 7.3% 7.5%

ASEAN-5 4.6% 4.6% 4.9%

IMF, World Economic Outlook (October 2015 Update)

• The global growth outlook has deteriorated compared to the last forecast update in mid-2015 with risks

skewed to the downside.

• Among advanced economies, the IMF expects growth to strengthen in the US over 2016 consistent with

recent partial economic indicators while the growth recovery in the Euro zone and Japan more cautious.

• China’s growth trajectory is forecast to continue to slow as economic rebalancing proceeds.

• Growth in Australia to improve and remain below-trend in 2016, consistent with internal and consensus view.

Source: International Monetary Fund (IMF); table produced by Economics@Telstra.

Note: A forecast update by the IMF is due in

late January 2016. Modest revisions are

expected but the main themes remain in place.

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CURRENT STATE OF PLAY: AUSTRALIAN TRENDS

Headline GDP growth masks weakness in the domestic

economy. Supports the RBA’s conditional easing bias. Source: Australian Bureau of Statistics; Economics@Telstra.

Following a multi-year mining investment boom which has now ended,

the Australian economy continues to go through a difficult transition

period as it seeks to rebalance growth drivers.

Against the backdrop of low interest rates and a lower A$, domestic

data flow over 2015 indicates that the necessary rebalancing of the

economy post-mining boom is occurring only gradually.

As a result, GDP growth is likely to remain below-trend in 2016 until the

shock of a substantial decline in mining investment and global

commodity prices is fully absorbed, which is unlikely for a few years.

Sub-par economic growth in Australia observed in H1 2015 continued in

the September quarter (latest data available). Headline GDP increased

by 0.9% in the three months to September on the back of strong net

exports, pushing the annual rate of growth higher to a still sluggish 2.5%

(up from 1.9% at end-June).

The latest GDP data have highlighted the difficulty in transitioning away

from mining-led growth to broader-based growth, with the economy’s

growth momentum unbalanced and lacking depth. Only net exports

provided a solid contribution to September quarter growth with domestic

demand remaining subdued.

Labour market trends have been broadly favourable over the past year

despite the economy growing at a below-trend pace over this period.

While slack in the labour market persists evidenced by low wage growth

and constraints on full-time employment growth, the unemployment rate

has remained broadly flat.

Risks to short-term growth skewed to the downside with the outlook for

non-mining business capex and employment undermined by lingering

uncertainty over the economic outlook overlayed by political ‘noise’.

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Sep-1999 Sep-2001 Sep-2003 Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015

Australia's Growth Momentum Sub-TrendExports Key Growth Driver w/ Domestic Demand Subdued

Net exports (% pt cont. to qtrly GDP)

GDP (annual % chg)

Domestic demand (annual % chg)

(All data are real, seasonally adjusted)

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15

Real GDP, Domestic Demand,

CPI Inflation & RBA Cash Rate

Annual growth in Real GDP

RBA Cash Rate

Headline CPI inflation

Annual growth in domestic demand

GDP growth improved in Q3

2015 while domestic demand

weakened. Below-trend growth &

soft demand vindicates RBA

commitment to ongoing stimulus.

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RECENT TRENDS IN CONSUMER SPENDING

Source: Australian Bureau of Statistics; Economics@Telstra.

Moderation in HDI growth due to low wage inflation. Weak wage growth creating new

jobs (though full-time unemployment remains high) & sustaining current employment

levels.

Growth in consumer spending remains on a tentative upswing after being

sluggish in recent years. Drawdown in savings partly financing spending.

Consumer spending is resilient, but growing at a

lacklustre pace. Subdued consumer confidence,

slow wage growth & concerns about the outlook

key factors weighing on spending propensity.

The resilience of aggregate consumer spending (in real terms)

continues to underscore GDP growth with the quarterly pace of

spending observed in September (+0.7% q/q & 2.7% y/y) slightly above

the average rate observed over 2014 and H1 2015.

Decent employment growth, a positive housing wealth effect and a

modest downward trend in the household saving ratio over the past year

(with the latter now 9.0% cf. a 2014 average of 9.5%) have played a key

role in supporting household expenditure.

Growth in household disposable income (HDI) continues to be resilient

despite soft nominal wage growth over 2015. In the September quarter,

HDI increased by 0.5% (with growth over 2015 at 2.8% cf. 3.6% over

2014). On an annual basis, HDI growth stabilised at around 4% - down

on its recent 10-year average (6.3%).

In an outcome consistent with the moderate pace of growth in consumer

spending, retail sales increased 0.4% in November 2015 (up 4.3%

across the year; the latest data available).

According to the ABS, the latest national retail sales data suggest that

aggressive price discounting continues to buoy retail activity with

consumers having limited capacity to lift spending further.

The outlook for consumer spending is influenced by the evolution of

fiscal and monetary policy with the latter expected to remain stimulatory

in 2016 and 2017; a resilient labour market aided by low wage growth;

improved household balance sheets mainly driven by high asset prices

(esp. housing); and further gains in housing activity.

-2%

0%

2%

4%

6%

8%

10%

12%

14%


Consumer Spending, Household Income and Savings (Annual % Change)

Savings (% HDI) Real Consumer Spending Household Disposable Income

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

Sep-2001 Sep-2003 Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015

Household Disposable Income & Employment(Annual Growth)

Wage growth

Employment growth

HDI

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WESTPAC-MI CONSUMER CONFIDENCE

Source: Australian Bureau of Statistics; Westpac-Melbourne Institute; Economics@Telstra.

The RBA can only do so much to support confidence. “Animal spirits” need to lift.

Confidence among consumers effectively at a neutral level. While recently improved,

sentiment continues to be weighed down by high un/N rate and weak wage growth.

Volume growth in retail & total spending holding up well buoyed by low price

inflation. But confidence levels remain broadly subdued weighing on demand.

The latest Westpac-Melbourne Institute research has shown that

consumer sentiment levels in December consolidated most of the

previous month’s gain.

Possible structural changes to the GST, concern over heightened job

insecurity, moderating trends in housing, and limited spending capacity

given weak wage growth, are key issues weighing on confidence.

The index of consumer confidence in December fell marginally from

101.7 to 100.8 (down 0.8% m/m but up 10.6% y/y), and remains broadly

neutral (an index reading below 100 means pessimists outnumber

optimists).

The weight of negative factors impacting consumer confidence remains

a non-trivial threat to the outlook for consumer spending in 2016 likely

sustaining below-trend growth therein.

The unemployment rate remains a key factor impacting consumer confidence.

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.560

65

70

75

80

85

90

95

100

105

110

115

120

125

Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15

Per CentIndex Number

Consumer Confidence & Unemployment Rate

Consumer Confidence (Index) (LHS)

Unemployment Rate (Inverted) (RHS)

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15

Consumer Confidence & Monetary Policy(Annual % Change)

Westpac-MI Consumer Confidence (LHS)

RBA Cash Rate - Inverted (RHS)

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15

80

90

100

110

120

130

Index Number

Consumer Confidence & Household Spending(Quarterly data; Annual Growth Rates)

Consumer Confidence (Index) (6-month lead) (RHS) Real Consumer Spending (LHS)

Real Domestic Demand Real (Volume) Retail Sales

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RECENT TRENDS IN BUSINESS INVESTMENT

Source: Australian Bureau of Statistics; Economics@Telstra.

Non-mining capex esp. in services has weakened with the outlook to remain subdued.

Current trends in business capex highlight the significant decline in mining and

mining-related capex in line with prior outcomes.

The changeover in the economy from mining-led to broad-based growth

continues to play out slowly. Capex growth now at lowest since early 1990’s recession.

The latest ABS business capex data for the September quarter confirms

that relative to its 2012-13 peak, mining investment is approximately

50% through its multi-year decline. In an outcome well below market

forecasts, aggregate business capex decreased by 9.2% q/q, to be down

20.0% y/y (a ‘recessionary’ level).

The quarterly contraction in business capex (in real or volume terms)

highlights the fact that the economy continues to go through a difficult

transition period.

After a multi-year mining capex boom, the rotation of growth drivers

away from mining (down 10.4% q/q and 29.6% y/y) towards higher levels

of investment in the services sector (down 10.0% q/q and 10.5% y/y)

remains elusive.

While partly boosted by stronger activity in the housing market and the

property-related services sector, a challenging environment for non-

mining capex persists despite the RBA’s accommodative monetary

policy settings and the lower key US$/A$ cross rate.

The tepid outlook for business capex was confirmed by the ABS’ fourth

estimate for business capex in 2015-16 which was 20.9% lower than the

comparable fourth estimate for 2014-15. But estimate 4 is 4.0% higher

than estimate 3 for 2015-16.

As the economy moves away from capital-intensive mining and

manufacturing sectors towards more labour-intensive, services-based

sectors which tend to have lower average levels of investment, it is

expected that growth in aggregate business capex will be slower than in

previous episodic RBA easing cycles. This will sustain below-trend GDP

growth in 2016.

Business capex is weak and will remain a drag on

economic growth in 2016 and 2017.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Sep-89 Sep-91 Sep-93 Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15

Real Business Capital Expenditure

Quarterly Growth

Annual Growth

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


Real Business Capex by Industry: Post-GFC(Annual % Change)

Total industry Mining

Manufacturing Other industries

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NAB BUSINESS CONFIDENCE & CONDITIONS

Source: Australian Bureau of Statistics; NAB; Economics@Telstra.

Business confidence & conditions both above their respective 10-year averages. Further gains in business confidence from stimulatory monetary policy limited.

Recent NAB business survey highlights resilience in non-mining business

conditions which continues to gain traction from accommodative RBA policy.

But the improvement in business conditions & growth in domestic demand non-

synchronised. Highlights dominant impact of mining downturn via capex decline.

Despite lower commodity prices and a loss of domestic growth

momentum in Q3 2015, the latest NAB monthly business survey for

November revealed resilience in both business confidence and business

conditions.

In November, the index of business confidence remained favourable and

above its recent 10-year average (+3.4) rising from an index reading of

+3 points to +5 points. At the same time, the index of business

conditions has consolidated well above its recent 10-year average level

(+4) stabilising at +10 index points.

While underlying growth momentum in the domestic economy remains

weak as evidenced by the latest GDP data, the services sector

continues to report favourable business conditions.

The survey also highlights the growing gap between deteriorating mining

and manufacturing sectors, and expanding services sector activity.

-20

-15

-10

-5

0

5

10

15

20

25

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15

Index Number

Domestic Demand Growth & NAB Business Conditions(Quarterly Data)

Annual Growth in Domestic Demand (Real) (LHS)

NAB Business Conditions (Net Balance, 1 qtr lead) (RHS)

Annual Growth

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

Nov-03 Mar-05 Jul-06 Nov-07 Mar-09 Jul-10 Nov-11 Mar-13 Jul-14 Nov-15

Index Number

NAB Business Confidence & Business Conditions(Monthly Data)

Business confidence index

Business conditions index

-100

-75

-50

-25

0

25

50

75

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15

Basis PointsIndex Number

Business Confidence & Change in RBA Cash Rate

Monthly basis point change in

RBA Cash Rate (RHS)

NAB Business Confidence

(Index) (LHS)

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OUTLOOK FOR AUSTRALIAN GDP GROWTH

Thematically, the main macro trends remain unchanged with output (ex.

mining), demand, employment and wages expected to continue to grow

at a soft pace in 2016 assisting in containing inflation.

The cyclical downturn in the global commodity market and sharp drop-off

in mining capex expected to be largely offset by higher mining production

and export volumes.

Export-led economic growth is thus forecast to continue over most of the

forecast horizon while growth in domestic demand could remain subdued.

The export phase of the mining boom is less labour intensive compared

to the recent multi-year investment phase so should boost labour

productivity but do little to lift economy-wide income growth.

Under the auspices of low interest rates and a lower US$/A$, the

transition away from mining-led growth to broad-based growth such as

consumer spending and housing is proceeding, albeit slower than

desired.

Accordingly, the outlook for short-term growth is somewhat pessimistic as

the economy struggles back towards its trend rate (which is arguably

structurally lower). Indeed, with population growth slowing in recent years

due to lower levels of net migration, this will weigh on economic growth

going forward.

Where previously the potential trend growth rate was estimated at around

3.25%, many analysts (inc. the RBA and Treasury) now consider the

potential growth rate being closer to 2.75%-3.0% (see top chart).

Risks to short-term growth remain skewed to the downside with the

outlook for non-mining business capex and employment undermined by

lingering uncertainty over the economic outlook. RBA monetary policy is

likely to remain accommodative and on hold through this year.

Growth forecast to improve by end-2016 though

significant headwinds and risks persist.

2.6%2.9%

3.1%2.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f)

Australian GDP & CPI Inflation Outlook(Year average % change)

Real GDP CPI Inflation Long-term GDP growth rate

New lower

trend rate??

2.6%

2.9%3.1%

2.9%

-2%

-1%

0%

1%

2%

3%

4%

2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f)

Points

Contributions to Annual GDP Growth

Net exports Housing

Consumer spending Business capex

GDP

Consumer spending, housing & net exports key growth drivers over

the early/middle forecast period offsetting drag from weaker mining

capex (and to a lesser extent, fiscal consolidation).

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CPI PRICE INFLATION: Q3 2015

The modest rise in headline inflation in the September quarter 2015 (up

0.5% q/q and 1.5% y/y) was below market and internal forecasts.

The economy’s soft growth pulse, sluggish domestic demand and weak

wage growth given labour market slack are holding down demand-pull

inflationary pressures. The current era of ‘low-flation’ and a sustained

negative output gap are key factors weighing on the outlook for nominal

and real GDP growth.

The underlying rate of inflation (i.e., ex-energy and food prices), and a

key focus of policymakers, rose by 0.3% in the September quarter,

resulting in the annual rate stepping down from 2.3% to 2.2%. Trends in

underlying inflation are critical for monetary policy deliberations as they

provide a better gauge of fundamental price pressures in the economy.

In terms of annual price increases, elevated price pressures evident

across key areas including household contents and services (+1.8% cf.

post-GFC avg. of +0.9%) and recreation (+1.1% cf. post-GFC avg. of

+0.4%). Structural price pressures remain in health and education.

Source: Australian Bureau of Statistics; RBA; Economics@Telstra.

Cyclically benign inflation in Australia underscoring a

‘lower for longer’ interest rate scenario to support the

2016 and 2017 growth outlook.

-1%

0%

1%

2%

3%

4%

5%

6%


Consumer Price Index: Headline & RBA Core Inflation

Annual headline % change

Quarterly headline % change

Annual 'core' or 'underlying' rate is

average of RBA's weighted median & trimmed mean measures

RBA Target Range: 2%-3%

annual rate (on average) across the economic cycle

* Average of weighted median & trimmed mean measures.

Consumer Price Index: Q3 2015 3-year

Component (weight in CPI basket) Q2 2015 Q3 2015 Q2 2015 Q3 2015 CAGR

Food (16.8%) -0.2% 0.1% 1.3% 0.2% 1.0%

Alcohol & Tobacco (7.1%) 1.2% 1.3% 4.8% 5.0% 5.4%

Clothing & Footwear (4.0%) 1.3% -1.1% -0.9% -1.0% -1.0%

Housing (22.3%) 0.7% 0.6% 2.5% 2.7% 3.0%

Household contents (9.1%) 1.0% 0.8% 1.4% 1.8% 0.7%

Health (5.3%) 2.7% 0.3% 4.3% 4.8% 4.5%

Transport (11.6%) 3.4% 0.1% -2.4% -2.2% 0.2%

Communication (3.1%) -0.6% -2.0% -3.4% -4.1% -1.4%

Recreation (12.5%) -1.4% 0.8% 0.9% 1.1% 1.3%

Education (3.2%) 0.0% 0.2% 5.4% 5.5% 5.5%

Finance (5.1%) 0.3% 0.5% 2.1% 2.0% 2.0%

Headline CPI 0.7% 0.5% 1.5% 1.5% 2.0%

RBA Underlying CPI* 0.6% 0.3% 2.3% 2.2% -

Quarterly % Annual %

-3%

-2%

-1%

0%

1%

2%

3%

Sep-2003 Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015

Australian Economy: Estimated Output Gap* & CPI(*Output Gap = Actual GDP Growth less Potential (Trend) GDP Growth)

Output Gap (% points)

CPI A% (Deviation from post-1990 average)

Negative output gap

tames inflation

Actual output is less than

full-capacity output

Underlying CPI

steady in lower-half

of RBA target zone

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OUTLOOK FOR INFLATION & MONETARY POLICY

Source: RBA; Table produced by Economics@Telstra.

While the short-term growth outlook has improved, the RBA

is likely to maintain a conditional easing bias in 2016.

Inflationary pressures in the short-run are likely to remain subdued given little sign that demand is improving and moving onto a sustainable basis. Even

under a modest export-driven GDP growth scenario in 2016 and 2017 broader excess capacity is likely to persist given the patchwork nature of the

economy. Consequently the Australian economy is starting this moderate growth recovery/upswing with more spare capacity than in previous upswings.

This would limit upward pressure on the cost of labour, equipment and materials supporting the non-problematic inflation outlook.

The monetary policy transmission mechanism in the current easing cycle continues to only slowly impact broader activity (ex. housing) given the difficulty

in transitioning away from mining-led growth to broader-based growth. The downturn in mining capex is becoming more entrenched with limited offset

from other parts of the economy. This is sustaining a pace of growth that remains unbalanced and lacking depth.

In the second half of 2015, the RBA maintained a neutral/marginally dovish policy bias against the backdrop of sluggish domestic growth and cyclically

benign inflation, a posture retained at its latest December meeting. While the RBA has not signalled an end to the rate cut cycle (the last 25bps rate cut

was effected in May 2015), the likelihood that it will act on its conditional easing bias remains 50/50 according to some market analysts.

Arguably, the RBA is unlikely to act on this bias unless the labour market deteriorates significantly. The commencement of policy normalisation in the US

in December 2015 (albeit subject to a very cautious and gradual pace) will limit the need for additional monetary stimulus in Australia given the downward

pressure likely to be exerted on the US$/A$ - a lower exchange rate acts as a de facto interest rate cut. Accordingly, the current stance of monetary policy

is likely to be maintained over the coming year. It should be noted that the extent of policy normalisation that does eventuate in the US will be from a

lower end-rate (0.0% to 0.25%) and be more gradual than likely effected in Australia. As such, the interest rate differential support for the A$ will only

erode very gradually. Below are latest RBA forecasts for growth and inflation as per its latest Statement on Monetary Policy (SMP).

Actuals and forecasts are in y/y% change terms. RBA November 2015 SMP. Downgraded RBA forecasts in red.

Previous forecasts (where revised) in brackets. TLS forecasts presented elsewhere in the pack are FY averages.

GDP & CPI FORECASTS Latest Forecasts for year-ended ...

RBA November 2015 SMP (actual) Dec. 2015 June 2016 Dec. 2016 June 2017 Dec. 2017

Real GDP (Q3, 2015) 2.5% 2.25% (2.5%) 2%-3% 2.5%-3.5% 2.75%-3.75% (3%-4%) 3.0%-4.0% (3%-4.5%)

CPI inflation (Q3, 2015) 1.5% 1.75% (2.5%) 1.5%-2.5% (2.0%-3.0%) 2.0%-3.0% 2.0%-3.0% 2.0%-3.0%

Underlying CPI (Q3, 2015) 2.2% 2.0% (2.5%) 1.5%-2.5% (2.0%-3.0%) 2.0%-3.0% 2.0%-3.0% 2.0%-3.0%

Telstra (December 2015) (TLS forecasts in y/y% terms)

Real GDP 2.5% 2.4% 2.7% 3.1% 3.2% 3.4%

CPI inflation 1.5% 1.8% 2.2% 2.6% 2.6% 2.7%

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DETAILED MACROECONOMIC FORECASTS

* All forecasts are year average % change unless otherwise specified.

Economic Forecasts - Dec. 2015-Jan. 2016

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