Nov. 29, 2010 -
PRLog -- In a sign that the pace of economic recovery is weakening, Australia's real GDP growth came in at a seasonally adjusted 0.5% quarter-onquarter (q-o-q) in Q110, decelerating from the revised 1.1% figure registered in the last quarter of 2009. We maintain our view that the Australian economy will suffer from a significant housing price correction going forward. As home loans make up more than 70% of total domestic loan portfolio for some key players - Westpac Banking Corporation and Commonwealth Bank of Australia in particular - we expect bad debt write-offs in the coming quarters, which will drag the economy down as lending declines. Thus, we maintain our bearish outlook for Australia, with growth coming in at only 2.3% and 1.6% in 2010 and 2011 respectively. O n the political front, we continue to favour the ruling Australian Labor Party (AL P) over the opposition Liberal-National Coalition in the general elections to be held on August 21. We believe the move by Prime Minister and AL P leader Julia Gillard to set an early election date will help the incumbent party retain power for another three years, although we acknowledge a surprise win by the opposition to be a possibility due to the closeness of the election race. Regardless of the winner, the new government may need to contend with an economic slowdown in 2011, in line with our core view. We expect the Reserve Bank of Australia to maintain the cash rate at 4.50% over the next few months, before reducing the benchmark rate by a single 25 basis point cut to 4.25% by December 2010. Indeed, we are beginning to observe a disinflationary trend in Australia; the headline inflation figure in Q210 came in at a weaker-than-
expected 0.6% q-o-q, slower than the 0.9% increase registered in the previous quarter. We are factoring in further disinflation for the rest of the year, while keeping in mind the possibility that deflation could occur. While Australia benefits from a strong legal and institutional framework, the country still needs to invest heavily in its infrastructural network to help ease increasing urban congestion due to sustained population growth in the 2000s. This is despite Prime Minister Julia Gillard's statements about controlling population growth as part of building a 'sustainable Australia' in the run-up to the August 2010 elections, in contrast to her predecessor Kevin Rudd's proimmigration 'Big Australia' policy. Over the next decade, we believe foreign workers will continue to feature strongly in the country's economic performance, helping Australia fulfil its growth potential.
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