Quarterly Economic Outlook

Transcription

1 Quarterly Economic Outlook Global and Australian Forecasts KPMG Economics & Tax Centre July 2018

2 Contents Page Executive summary 3 Global outlook 5 Global forecasts 12 Australian outlook 14 Australian forecasts 22 KPMG Economics & Tax Centre contacts 23 2 Document Classification: KPMG Public

3 Executive Summary Global economy Global economic activity has remained strong despite losing some of its momentum in Q Global growth has been more broad-based with a pick-up in private business investment and global trade, and is expected to remain strong through 2018 driven by emerging and developing economies in Asia. In the advanced economies, employment remains strong, wage growth has picked up slightly, and the outlook for growth is generally positive. Growth in emerging market economies have returned to rates closer to historical averages but some countries like Argentina and Turkey have come under financial stress over the recent quarter, while growth in India has been strong but growth in China has moderated slightly in line with the Chinese government s target. KPMG Economics maintains its forecast of global growth with real GDP at 3.9% in 2018 and 3.9% in Australian economy The Australian economy grew by 1.0% q/q (seasonally-adjusted) in the March quarter of 2018 following an upwardly revised 0.5% q/q growth in Q On an annualised basis, the Australian economy grew at 2.6% y/y stronger than the upwardly revised 2.2% y/y in Q The stronger GDP results for the quarter in part reflects growth in exports of mining commodities which contributed around half of the growth in GDP. The unemployment rate was unchanged at 5.4% (seasonally-adjusted) in June 2018, with the Australian economy adding a substantial 51,000 (seasonally-adjusted) jobs in June 2018 bringing the total number of employed people to million. Headline inflation increased slightly to 2.1% y/y in Q (0.4% q/q), with underlying inflation remaining steady at 1.9% y/y (trimmed mean basis). KPMG Economics expects real GDP in Australia to grow at around 2.8% for FY2018 and 2.9% for FY2019. Australian forecasts FY17 FY18 FY19 FY20 FY21 FY22 GDP (Real) 2.1% 2.8% 2.9% 2.8% 2.7% 2.6% Inflation (1) 1.9% 2.2% 2.1% 2.6% 3.0% 3.1% Unemployment, % (1) 5.6% 5.4% 5.2% 5.0% 5.0% 5.0% $A/US$ (1) (1) = Average through the year 3

4 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 4 Document Classification: KPMG Public

5 Global Outlook

6 Global Outlook Since the start of the year, global economic activity has remained strong despite losing some of its momentum in Q Recent data has also shown that the components of global growth has been more broad-based with a pick-up in private business investment and global trade. Global growth is expected to remain strong through 2018 driven by emerging and developing economies in Asia. The latest July update of the IMF s World Economic Outlook projects global growth to reach 3.9% in 2018 and 2019 unchanged from the Fund s April 2018 World Economic Outlook forecast.1 In the advanced economies, employment remains strong, wage growth has picked up slightly, and the outlook for growth is generally positive. Above-trend growth has been recorded in a number of the major advanced economies. Growth in emerging market economies have returned to rates closer to historical averages but some countries like Argentina and Turkey have come under financial stress over the recent quarter. Growth in India has been strong but growth in China has moderated slightly in line with the Chinese government s target. The balance of risks though has shifted to the downside. In light of this, KPMG Economics maintains its forecast of global growth with real GDP at 3.9% in 2018 and 3.9% in Labour markets in the major advanced economies have tightened further and are estimated to be functioning close to, or above, potential in some countries. Employment has grown strongly and unemployment rates in the U.S. and Japan are at decade lows. Spare capacity in the labour market is gradually being absorbed, reflected in measures of underemployment which have been declining. Price inflation remains low although marginal increases have been observed in a number of the economies such as the U.S. Germany, and Japan. Wage inflation is still depressed but have also picked up marginally in the advanced economies. Looking ahead, inflationary pressures globally are expected to increase further in response to tighter labour markets and capacity constraints. 1 July 2018 World Economic Outlook (WEO). 6

7 Global Outlook Central banks in most major economies are in the process of gradually tightening their policy stance but, by and large, monetary policy remains broadly accommodative. Financial conditions have also tightened modestly over the last quarter, noticeable in U.S.-dollar money markets and spreads on corporate bonds. In the U.S., the Federal Open Market Committee (FOMC) raised the Federal Funds rate a further 25bps at its June meeting in The current Fed Funds target range now sits between 1.75% and 2.00%, and a further two 25bps hikes are forecasted for The Bank of England s (BoE) Monetary Policy Committee voted at its June meeting in 2018 to keep its policy rate unchanged at 0.5% - although the majority narrowed to 6-3 from 7-2. The Committee also voted unanimously to maintain the stock of U.K. government bond purchase at 435 billion. The European Central Bank (ECB) held its benchmark interest rate at 0.0% and announced the conditional conclusion of its asset purchase program by the end of December The key ECB interest rates are expected to remain at present levels at least through mid The Bank of Canada raised its target rate a further 25bps to 1.50% at the Bank s recent July meeting. The Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) and have kept their policy parameters unchanged (1.5% and -0.10%). 7

8 Global Outlook Among the major currencies, the U.S. dollar remains relative strong against a range of currencies with near-term momentum of the U.S. economy expected to strengthen. Portfolio outflows from emerging market economies have also contributed to the relative appreciation of the U.S. dollar. The British pound, which has been relatively subdued, could see increased volatility over the coming months with the uncertainty surrounding the outcome of Brexit negotiations returning to the fore. The BoE is expected to raise its policy rate at its August meeting next month. The Euro is down slightly on a trade-weighted basis since the start of the year. The Australian dollar has dipped slightly and is trading around USD$0.75 against the U.S. dollar. Looking ahead, KPMG Economics expects the Australian dollar to settle around the USD$ range in The latest RBA s Index of Commodity Prices (preliminary estimates for June) indicated a decrease of 0.2% (SDR terms) after decreasing 0.5% in May. Global oil prices have increased by around 15% since the last Quarterly Economic Outlook with Brent Crude and WTI currently trading between US$70-80/bbl. This is expected to have a negative net effect on global growth. KPMG Economics forecasts oil prices to fluctuate between US$65-75/bbl for Risks to the forecasts has shifted to the downside. Uncertainties related to global factors persist, in particular, escalating trade tensions which pose considerable risks to the outlook. The possible imposition of further tariffs by the U.S. and, in retaliation, tariffs imposed by its trading partners will not be without substantial implications for global trade and economic activity. Uncertainty surrounding the outcomes of the Brexit negotiations has come to the fore again with the U.K. s Brexit Secretary and Foreign Secretary resigning earlier in the month. 8

9 Global Outlook The U.S. economy grew at an annualised rate of 2.0% (seasonally-adjusted) in Q slightly below market expectations of 2.2% growth. Growth was led by increases in personal consumption expenditure, fixed investment, and government expenditure. Business and consumer confidence remain relatively strong. Job gains continue to be elevated amid a tight labour market with the civilian labour force growing by 601,000 in June The unemployment rate rose by 0.2 percentage points to 4.0% in June from 3.8% in May but the increase is likely a reflection of more entrants to the labour force with the labour force participation rate also edging up 0.2 percentage points to 62.9%. Headline inflation (PCE) accelerated 2.3% in May 2018 with core inflation also rising to 2.0%. U.S. inflation is now back at the Fed s 2% target but officials still believe the underlying trend in inflation has been little changed. Looking ahead, the outlook for the U.S. economy remains positive with fiscal stimulus and domestic demand expected to boost the U.S. economy over the short-term. Risks to the longer-term outlook, however, are tilted to the downside with the administration planning to assess tariffs on another $200 billion in Chinese goods which could have further implications on global trade. The Euro Area (EA) and European Union (EU28) economies both grew by 0.4% (seasonally-adjusted) during the first quarter of This marked five years of continued economic expansion in the EA with underlying fundamentals remaining solid despite a slight softening in growth at the start of the year. Year-on-year, GDP in the EA increased by 2.5% (seasonally-adjusted) and by 2.4% (seasonallyadjusted) in the EU. 9

10 Global Outlook The unemployment rate in the EA was 8.4% (seasonally-adjusted) in May 2018, down from 8.7% in January This was the lowest level since December The EU unemployment rate was 7.0% (seasonally-adjusted) in May 2018, unchanged from April Member States with the lowest unemployment rates in May 2018 were the Czech Republic (2.3%) and Germany (3.4%). The highest unemployment rates were registered in Greece (20.1% in March 2018) and Spain (15.8%). Headline inflation in Europe increased to 2.0% in June 2018 from 1.9% in the previous month. This was a reflection of higher energy and food prices. Core inflation is still relatively subdued at 1.0% in June, decreasing from 1.1% in May. Looking ahead, as the economy continues to grow and labour markets improve, underlying inflation is expected to pick-up. GDP in the U.K. grew by 0.2% in the three months to May (from May, the Office of National Statistics will publish monthly GDP estimates). Indicators of household spending and sentiment have rebounded from relative weakness in Q1 2018, in part related to the adverse weather. Employment growth has remained solid and the unemployment rate for May was 4.2%, down from 4.5% a year earlier. CPI inflation was 2.4% in June, unchanged from May. The largest upward contributions to inflation were motor fuel, domestic gas and electricity. Inflation is projected to rise in the near-term due to higher oil prices and a weaker sterling exchange rate. The Monetary Policy Committee at the Bank of England (BoE) have kept interest rates unchanged at 0.5% at its June monetary policy meeting in The bank s quantitative easing programme also remained unchanged - capped at 435 billion on its asset purchases. Market participants and economists currently expect the BoE to raise rates at its August 2018 meeting. Risks are to the downside for the U.K. economy with Brexit looming and discussions on the outcome still inconclusive. 10

11 Global Outlook The Chinese economy grew 6.7% y/y in Q with a strong performance from the service sector. Growth was slightly lower than previous readings due to stricter financial regulations but in line with the Chinese authorities target of 6.5% in Strong exports and industrial production were the main drivers of economic growth in China in the first quarter of The housing market has slowed as a consequence of property control policies implemented in 2017 but growing concerns over debt levels in China remain. China s debt-to-gdp ratio stands at around 250% with corporate debt at 160% and household debt at around 50% of GDP. Consumer prices rose 1.9% y/y in June 2018 from 1.8% y/y in May. The renminbi has softened to around 6.74 against the USD its weakest level since the start of the year. This was in part a reflection of moderating economic fundamentals and a stronger U.S. dollar. The People s Bank of China (PBOC) is expected to keep its lending rate unchanged at 4.35% for the remainder of The Japanese economy contracted in the first quarter of GDP growth was -0.2% (seasonally-adjusted) q/q in Q dragged down by subdued private demand and private inventories. This was significantly weaker than the upwardly revised 0.3% growth in the previous quarter. Public expenditure and private consumption were also flat though net exports had a positive contribution to GDP growth. Looking ahead, momentum seems to have stalled with the BoJ s latest Tankan survey reporting a decline in business sentiment. The unemployment rate dropped to 2.2% (seasonallyadjusted) in May the lowest rate since August and the Japanese economy is either at or very close to full employment. Consumer prices rose 0.7% (y/y) in June 2018 unchanged from May driven by increases in transport and communication, and energy costs. Core inflation edged up to 0.8% in June from 0.7% the month before but still remains far short for the BoJ s 2% inflation target. The Bank of Japan is set to keep its monetary stimulus unchanged for the foreseeable future and also downgraded its assessment of core inflation at its June meeting. The key shortterm interest rate remains unchanged at -0.1%. 11

12 Global Outlook Growth in Real GDP Year End December Annual Inflation Year End December OECD 2.5% 2.5% 2.2% 2.0% 1.8% 1.8% OECD 2.2% 2.4% 2.2% 2.2% 2.1% 1.9% Americas Brazil 1.0% 1.7% 2.0% 2.0% 2.1% 2.1% Canada 2.9% 2.7% 2.2% 1.9% 1.6% 1.5% Latin America 2.5% 3.4% 3.2% 2.9% 2.6% 2.3% Mexico 2.2% 2.2% 2.5% 2.7% 2.8% 2.9% USA 2.2% 2.6% 2.5% 2.1% 1.9% 1.9% Americas Brazil 2.9% 4.4% 5.8% 6.4% 6.3% 5.8% Canada 1.8% 1.8% 1.3% 1.7% 2.0% 2.0% Latin America 5.5% 3.9% 5.2% 5.1% 4.5% 3.9% Mexico 6.6% 5.0% 3.4% 3.6% 4.0% 4.1% USA 1.8% 2.4% 2.2% 2.2% 2.0% 1.7% Europe EMU 2.5% 2.2% 1.8% 1.6% 1.4% 1.3% France 1.9% 1.9% 1.8% 1.7% 1.7% 1.6% Germany 2.6% 2.4% 1.8% 1.5% 1.3% 1.2% Greece 1.3% 2.3% 2.2% 2.1% 2.1% 2.2% Ireland 6.6% 4.1% 2.6% 2.8% 2.1% 1.8% Italy 1.5% 1.4% 1.3% 1.2% 1.1% 1.1% Russian Federation 1.9% 2.0% 2.4% 2.3% 1.8% 1.7% UK 1.9% 1.5% 1.6% 1.8% 1.9% 1.9% Europe EMU 1.4% 1.7% 1.6% 1.6% 1.6% 1.6% France 1.2% 1.4% 1.4% 1.5% 1.6% 1.5% Germany 1.6% 1.9% 1.7% 1.7% 1.8% 1.9% Greece 0.9% 1.5% 1.6% 1.9% 2.2% 2.3% Ireland 1.4% 2.0% 1.8% 1.8% 1.7% 1.7% Italy 0.8% 1.6% 1.5% 1.5% 1.6% 1.6% Russian Federation 3.3% 3.9% 4.6% 4.4% 4.2% 4.1% UK 2.4% 2.7% 2.5% 2.1% 2.3% 2.3% Africa 1.7% 2.6% 3.7% 3.9% 3.9% 3.9% South Africa 1.1% 1.4% 1.4% 2.0% 2.4% 2.6% Africa 8.7% 9.9% 7.9% 7.3% 6.5% 5.7% South Africa 4.8% 5.4% 5.9% 5.5% 4.4% 3.4% Middle East 2.7% 3.4% 3.4% 3.2% 3.0% 2.8% Middle East 10.0% 9.3% 7.2% 5.7% 4.4% 3.4% Asia China 6.8% 6.4% 6.3% 5.9% 5.8% 5.7% East Asia 4.3% 4.2% 4.1% 4.0% 3.9% 3.8% Hong Kong 3.5% 2.4% 1.7% 2.2% 2.0% 2.3% Indonesia 4.9% 5.5% 5.1% 4.4% 4.3% 4.2% India 6.7% 6.9% 7.2% 7.0% 6.9% 6.8% Japan 1.8% 1.3% 0.8% 0.8% 0.8% 0.9% Singapore 3.4% 3.4% 1.8% 2.8% 3.6% 4.0% South Korea 3.1% 3.4% 3.6% 3.5% 3.6% 3.7% Taiwan 2.6% 2.2% 2.7% 3.0% 3.1% 3.1% Vietnam 6.7% 6.7% 5.7% 5.8% 5.0% 5.0% Asia China 1.8% 2.5% 2.9% 3.0% 2.7% 2.7% East Asia 3.1% 5.1% 5.1% 4.8% 4.5% 4.2% Hong Kong 3.3% 2.7% 2.3% 2.6% 2.8% 3.1% Indonesia 3.5% 5.4% 4.2% 4.1% 4.0% 4.0% India 4.2% 4.5% 4.6% 4.9% 5.0% 5.0% Japan -0.1% 1.1% 1.2% 1.3% 1.3% 1.4% Singapore 0.9% 1.6% 1.9% 2.1% 2.6% 2.9% South Korea 1.9% 2.6% 1.7% 1.7% 1.7% 1.8% Taiwan -0.1% 0.0% 0.7% 1.4% 1.8% 2.0% Vietnam 4.0% 5.5% 6.0% 5.3% 3.9% 3.9% Oceania New Zealand 2.8% 3.3% 3.2% 2.5% 2.0% 2.0% Oceania New Zealand 1.1% 2.7% 2.5% 2.1% 2.0% 2.3% World 3.8% 3.8% 3.8% 3.6% 3.5% 3.4% 12

13 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. 13 Document Classification: KPMG Public

14 Australian Outlook

15 Australian Outlook The Australian economy grew by 1.0% q/q (seasonally-adjusted) in the March quarter of 2018 following an upwardly revised 0.5% q/q growth in Q On an annualised basis, the Australian economy grew at 2.6% y/y stronger than the upwardly revised 2.2% y/y in Q The stronger GDP results for the quarter in part reflects growth in exports of mining commodities which contributed around half of the growth in GDP. Net exports consequently had a positive influence on GDP growth for the quarter, increasing economic output by 0.3% in Q Household consumption expenditure fell slightly from the previous quarter but still contributed 0.2 percentage points to GDP growth while government expenditure added a further 0.2 percentage points. Gross fixed capital formation grew as private investment increased 1.2%, adding 0.4% to GDP growth. Exports of goods and services rose 2.4% while imports of goods and services grew by 0.5%. In aggregate, net exports had a positive contribution of 0.3% towards GDP growth in the quarter. The unemployment rate was unchanged at 5.4% (seasonally-adjusted) in June 2018, in line with market and economists expectations. The Australian economy added a substantial 51,000 (seasonally-adjusted) jobs in June 2018 bringing the total number of employed people to million. The labour force participation rate increased by 0.2% to 65.7% from 65.5% in May. Monthly hours worked (seasonally-adjusted) across all jobs in the economy increased by 0.6% (10.7 million hours) and the employment to population increased by 0.2% to 62.1% in June. Headline inflation increased slightly to 2.1% y/y in Q (0.4% q/q), with underlying inflation remaining steady at 1.9% y/y (trimmed mean basis). Inflation remains contained and under the RBA s medium-term target of 2.5%. The RBA s official cash rate (OCR) is accommodative at 1.5% and is expected to remain unchanged for Looking ahead, KPMG Economics forecasts real GDP growth for the Australian economy to be about 2.8% for FY2018 and 2.9% for FY

16 Government Government expenditure grew by 1.6% q/q (seasonally-adjusted) in Q1 2018, down from 2.2% q/q (seasonally-adjusted) in Q This was driven by an increase in non-defence expenditure (2.4% q/q) while Defence expenditure declined 0.6% q/q. National government expenditure increased 1.7% q/q in Q (down from 2.8% q/q in Q4 2017) and State and local government spending grew by 1.4% q/q (down from 1.8% q/q in Q4 2017). The underlying cash balance for the financial year to 31 May 2018 was a deficit of $10.02 billion, $5.76 billion lower than the Revised Budget profile deficit of $15.78 billion. The fiscal balance for the financial year to 31 May 2018 was a surplus of $1.13 billion. The net operating balance for the year to 31 May 2018 was a surplus of $1.85 billion - $7.3 billion better than the Revised Budget profile deficit of $5.45 billion. Taxation revenue for to May stood at $ billion. The Federal Government delivered the Budget on 8 May 2018 with the theme of building a stronger economy for Australia. The Government has a $75 billion 10-year national infrastructure plan for the States and Territories with new infrastructure spending initiatives for the Melbourne airport rail link, Queensland major highway, and rail improvements and projects in Western Australia. Other key measures include personal income tax reductions in a three phased approach and a withdrawal of last year s proposal to increase the Medicare levy. The Government also projects the Budget to return to surplus by As at June 2018, the total face value of Commonwealth Government Securities (CGS) on issue stood at around $540 billion, up from $528 billion in March According to the Australian office of Financial Management (AOFM), Gross Treasury Bond issuance in totalled $75.5 billion. Gross Treasury Bond issuance in is expected to be around $70 billion. The Federal Government s debt-to-gdp position stands at just over 40%. 16

17 Production The Finance and Insurance Services industry continues to be the largest industry, accounting for 9.5% of the economy s Gross Value Added. Construction (8.0%), Health Care and Social Assistance (7.9%), Manufacturing (6.4%) and Mining (6.4%) make up the top five largest industries within the Australian economy, accounting for just over 38% of GVA. GVA growth in Q was registered in 14 of the 20 industries. Growth was driven by Administrative and Support Services (3.0% q/q), Mining (2.9% q/q), Manufacturing (2.4% q/q), and Health Care and Social Assistance (2.1% q/q). Agriculture, Forestry and Fishing (-1.7% q/q), Accommodation and Food Services (-1.3% q/q), Construction (-0.7% q/q), Information, Media and Telecommunications (-0.4% q/q), Rental, Hiring and Real Estate Services (0.4% q/q), and Electricity, Gas, Water and Waste Services (-0.1% q/q) all experienced contractions in GVA over Q According to the June 2018 ABARES Australian Crop Report, total area planted to winter crops is forecast to decrease by 4% to 21.1 million hectares as a result of forest declines in New South Wales, Queensland and Western Australia. Total winter crop production is forecast to fall slightly in to 37.7 million tonnes. Total summer crop production is estimated to have increased by 13% in to around 4.2 million tonnes. The Department of Industry, Innovation and Science (DIIS) anticipates that Australia s metallurgical coal production will increase by around 9.0% to million tonnes (Mt) in and remain at around similar levels (207 Mt) in Thermal coal production is expected to decrease by 1.3% (to Mt) in but increase to Mt in LNG production is expected to be strong over the next few years with total production projected at Bcm in and Bcm in Iron ore production is forecasts to increase to Mt in 2018 (up from Mt in 2017) and reach Mt in 2019, supported by productivity improvements and capacity expansions. 17

18 Consumption Household final consumption expenditure grew 0.3% q/q (seasonally-adjusted) in Q a drop-off from the 1.0% growth rate in the previous quarter. Household consumption expenditure was driven by Electricity, gas and other fuel (2.3% q/q), Communications (1.5% q/q), Transport services (1.1% q/q), and Furnishings and household equipment (1.0% q/q). Declines in household consumption expenditure were led by Alcoholic beverages (-2.0% q/q), Hotels, cafes and restaurants (-1.8% q/q), Cigarettes and tobacco (-0.3% q/q), and Operation of vehicles (-0.3% q/q). Retail trade growth increased by 0.4% (seasonally-adjusted) in May 2018, following a 0.5% rise in April On a quarterly basis, retail trade grew by 0.2% in Q from 0.8% in the previous quarter. The majority of categories recorded positive growth in the March quarter of 2018 with Household goods retailing (1.2%) leading the way. Growth was also driven by Clothing, footwear and personal accessory retailing (1.1%), and Food retailing (0.7%). Department stores (0.1%) and Other retailing (0.1%) were largely unchanged while a decline was observed in Cafes, restaurants and takeaway food services (-0.4%). Heavy household debt remains a concern amongst economists and policymakers. The OECD and the RBA, among others, have both recently highlighted the risks of increasing household debt on consumption and the domestic economy. The RBA s Governor, Philip Lowe, stated at the ECB forum in Sintra, Portugal, that biggest risk to the Australian economy was household debt levels. Consumer sentiment, as measured by the Westpac-Melbourne Institute Index of Consumer Sentiment, rose 3.9% in July to from in June This was a strong reading and the highest Index reading since November Expectations for the economic outlook over the next five years surged 9.8% from the previous month and expectations for the economic outlook over the next 12 months rose by 3.9%. The outlook for family finances compared to a year ago was also strong. Overall, the number of optimists still outnumber the number of pessimists within the 1,200 survey respondents. 18

19 Investment Total new capital expenditure in Australia rose 0.4% q/q (seasonally-adjusted) in the March quarter of Expenditure on building and structures declined 1.3% q/q (seasonally-adjusted) but expenditure on equipment, plant and machinery increased 1.9% q/q (seasonally-adjusted) in Q The number of dwelling approvals fell by 3.2% m/m (seasonally-adjusted) in May 2018, driven by a decline in private sector houses (-8.6%). Dwelling approvals declined in New South Wales (-1.2%), Queensland (-26.6%) and Western Australia (-0.6%) but increased in South Australia (35.8%) and Tasmania (1.8%), and remained relatively flat in Victoria (0.3%). The property market continues to cool, particularly in Sydney and Melbourne. The HIA New Home Sales indicator has declined since the last Outlook. New housing sales in May fell 4.4% (seasonally-adjusted) from the month prior with New South Wales (- 6.8%) and Victoria (-4.6%) recording the most significant declines. Looking ahead, this slowdown is likely to continue in the near-term with tighter lending conditions and a slower pace of credit growth. The NAB Business Confidence Index fell 1 point to 6 in June, from an upwardly revised 7 in May This was the lowest reading since December The Business Conditions sub-component of the Index, however, increased by a point to 15 in June Gains in the Index were driven by trading conditions and profitability which increased from 20 to 23 and 12 to 17, respectively. The employment conditions sub-component of the Index declined to 5 in June 2018 from 9 the previous month. Services and Manufacturing PMIs are still in the expansionary range (above 50). The AIG Performance of Manufacturing Index in Australia declined slightly to 57.4 in June 2018 (from 57.5 in January 2018) while the Australian Performance of Services Index increased strongly to 63.0 in June 2018 from 59.0 in May

20 Labour market The labour market in Australia remains healthy and recent data have shown increased strength. Employment increased very strongly by 50,900 (seasonallyadjusted) persons from May to June 2018 bringing the total number of employed persons to 12,573,600. The proportion of full-time employed persons increased by approximately 41,200 with the domestic labour force now comprising around 8.57 million full-time employed persons (approximately 68% of the total employed labour force) and 4.01 million part-time employed persons (approximately 32% of the total employed labour force). The unemployment rate stood at 5.4% (seasonally adjusted) in June 2018, unchanged from the month prior. The number of unemployed persons looking for full-time work increased 5,100 to 501,900 and the number of unemployed persons only looking for part-time work decreased 6,100 to 212,200. Monthly hours worked in all jobs also increased by 0.6% to 1,750.7 million hours. The labour force participation rate increased by 0.2 percentage points to 65.7% in the month of June 2018 close to the record high of 65.8% in The employment-to-population ratio also increased by 0.1 percentage points to 62.1% in June 2018, reflecting an increase in the potential supply of labour to the Australian market. Wage growth, once again, remains relatively subdued. The Wage Price Index rose by 2.1% y/y (seasonally-adjusted) in the March quarter of On a quarterly basis, wages rose 0.5%, with wages in the private and public sector both growing by 0.5%. Forward-looking indicators signal a marginal slowdown in employment growth in the labour market over the next quarter. The ANZ Job Advertisements Series showed a decrease of 1.7% m/m in the number of job advertisements in June On an annualised basis, job advertisements recorded an increase of 6.6% in June KPMG Economics forecast for the unemployment rate remains at around 5.4% for

21 Net exports The Australian economy posted a current account deficit of $10.47 billion in Q1 2018, a decrease of $4.2 billion from the previous quarter. The trade balance returned to surplus at $4.08 billion in the March quarter of 2018 with the value of exports increasing 7.4% from the previous quarter. The value of exports increased to $103 billion in Q (from $95.93 billion in Q4 2017) while imports increased to $98.91 billion in Q from $96.95 billion the previous quarter. The net income deficit, however, widened in Q to $14.6 billion from $13.6 billion the previous quarter on rising returns to foreign investors. Export of goods contributed $81.61 billion while export of services contributed $21.38 billion to the trade balance. Imports of goods increased to $76.57 billion in Q (from $74.34 billion the previous quarter), while imports of services increased to $22.51 billion in Q from $22.48 billion the previous quarter. Demand for Australian exports are expected to decline somewhat over the coming years as global demand for commodities, led by China, moderates. For the month of June 2018 (preliminary estimates), the RBA s Index of Commodity Prices indicated a decrease of 0.2% (SDR terms) after decreasing 0.5% in May. Over the year, the index has increased by 6.6% in SDR terms and 9.9% in Australian dollar terms, led by higher commodity prices. Australia s Terms of Trade (ToT) increased to index points in Q from in Q KPMG Economics forecast for the ToT for FY 2018 is little changed at around 96. The Australian dollar has depreciated slightly against the U.S. dollar since Q1 2018, and is currently trading at around USD c. On a trade-weighted basis, the Australian dollar is marginally higher since Q with the Index at around 62.6 at the end of June 2018 compared with 62.1 in April KPMG Economics have forecasts the AUD/USD exchange rate settling around the USD$ range in

22 Australian Outlook FY17 FY18 FY19 FY20 FY21 FY22 GDP (Real) 2.1% 2.8% 2.9% 2.8% 2.7% 2.6% Private Consumption 2.4% 2.8% 2.6% 2.5% 2.5% 2.4% Investment Business -6.7% 5.8% 2.6% 2.5% 2.6% 2.7% Housing 2.2% -3.2% -1.9% -1.2% 4.0% 3.0% Government Consumption 3.8% 2.3% 0.9% 1.0% 1.5% 1.7% Investment 16.0% -1.8% 1.0% 1.7% 2.0% 1.9% Total domestic demand 2.0% 2.9% 2.6% 2.0% 3.2% 2.3% Export volumes 5.4% 4.1% 7.2% 3.2% 1.7% 4.4% Import volumes 4.8% 6.7% 4.2% 3.9% 4.9% 3.2% Inflation (1) 1.9% 2.2% 2.1% 2.6% 3.0% 3.1% Real Personal Disposable Income 0.9% 1.7% 2.2% 2.5% 3.0% 2.8% Unemployment, % (1) 5.6% 5.4% 5.2% 5.0% 5.0% 5.0% Government Balance as % of GDP -1.3% -1.6% -1.1% -0.8% -0.7% -0.9% Govt. debt as % of GDP 44.9% 45.4% 44.7% 43.5% 41.9% 40.4% Current account as % of GDP -1.8% -2.0% -2.9% -3.9% -4.2% -4.3% $A/US$ (1) Terms of Trade (1) (1) = Value at end of the year 22

23 KPMG Economics & Tax Centre Key contacts Brendan Rynne Partner, Chief Economist Melbourne Tel: Grant Wardell-Johnson Lead Tax Partner Sydney Tel: KPMG does not make any statement in this report as to whether any forecasts or projections included in this report will be achieved, or whether the assumptions and data underlying any prospective economic forecasts or projections are accurate, complete or reasonable. KPMG does not warrant or guarantee the achievement of any such forecasts or projections. Any economic projections or forecasts in this report rely on economic inputs that are subject to unavoidable statistical variation. They also rely on economic parameters that are subject to unavoidable statistical variation. While all care has been taken to account for statistical variation, care should be taken whenever considering or using this information. There will usually be differences between forecast or projected and actual results, because events and circumstances frequently do not occur as expected or predicted, and those differences may be material. Any estimates or projections will only take into account information available to KPMG up to the date of this report and so findings may be affected by new information. Events may have occurred since this report was prepared, which may impact on it and its findings. The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity 23

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