Bank of America/Merrill Lynch are out with an interesting – cough – note this morning, outlining their top 10 themes, putting a hugely positive spin on the drop in the Australian dollar, while highlighting big domestic risks and brushing aside external threats, yet believing the RBA will hold all year as the mining capex cliff beckons?
Cognitive dissonance is a bitch and its dropping off puppies at the major instos’ left and right.
Here tis:
The global backdrop and further decline of the AUD should be a modest tailwind for the Australian economy in 2016.
• Challenges to growth remain and only a modest acceleration in real GDP growth is expected yet employment should remain solid
• The lack of any further deterioration in the domestic economy should prevent the need for the RBA to ease policy furtherA slight acceleration of growth in key trading partners and an improvement in competitiveness against them is expected to be a modest positive for Australia in 2016. This should come from both improved activity but also with a tailwind from a weaker AUD which is expected to depreciate against major trading partners.
Theme 1: GDP growth – the end of the bust
Australian growth has bottomed out, but challenges will persist, growth drivers offset by marked declines in resources investment.
Theme 2: Are services enough?
Services sectors are supporting activity, employment and exports, but the sector doesn’t invest enough to offset declines elsewhere.
Theme 3: Will unemployment keep falling?
We expect that the unemployment rate will become entrenched at or just above 6% as risks to the labour market persist.
Theme 4: Dwelling price growth to slow
Dwelling price growth will decelerate markedly with the risk that prices will decline outright, but any economic fallout should be limited.
Theme 5: The coming residential bust
The residential construction cycle has peaked at unprecedented levels, the question now becomes how quickly it declines.
Theme 6: Consumers to keep punching
Household spending growth will continue to modestly improve but no outperformance is expected and retail spending may lose out still.
Theme 7: Inflation to accelerate modestly
Inflation will accelerate via import prices & some key export prices, yet the output gap & soft wages will keep overall pressures modest.
Theme 8: A$ lower, commodities & China
The A$ will depreciate further in 2016 to US$0.65, Chinese growth will stabilise and continue to benefit the domestic economy.
Theme 9: Government reforms to test sentiment
Government reforms will test business & consumer sentiment alike, fiscal stringency continues despite the need for infrastructure spending.
Theme 10: No more cuts from the RBA
Despite downside risks we do not expect the performance of the domestic economy to force the RBA to cut rates again