The Australian Economy in 2015–16: Uncertainties and Challenges

In 2014–15, the Australian economy continuedits transition following the investment phase ofthe mining boom and was buffeted by slowinggrowth in its most important trading partner,China.In an environment of weak domestic demandgrowth and modest inflation, monetary policyremained accommodative. The cash rate waslowered twice in 2014–15, reaching 2 per cent,its lowest level during the inflation-targetingregime.Fiscal policy at the federal level became lessfocused on fiscal consolidation. This in partreflected the difficulty in passing suchmeasures through the Senate, together with theadverse impact of falls in the terms of tradedragging on revenues.The macroprudential policies announced bythe Australian Prudential Regulatory Authority(APRA) appear to have impacted on creditgrowth in the second half of 2015.Looking forward, net exports are likely tocontribute significantly to growth, in partreflecting the previous substantial investmentsin the liquefied natural gas sector becomingproductive (Table 1). Any pick-up in domesticdemand growth seems likely to be modest. Ofparticular importance for the outlook is theconsiderable uncertainty that presentlysurrounds the near-term growth prospects ofthe Chinese economy. The rest of this article is structured as follows.In Section 2, we discuss the key internationaleconomic developments that have impinged onthe Australian economy and their implicationsfor the terms of trade and the real exchangerate. Section 3 discusses the developments inthe real economy and demonstrates that thetransition in the sources of growth hascontinued, albeit modestly. Section 3 alsodiscusses the implications for the labourmarket and developments in both financial andhousing markets. Finally, Section 4 concludes.embarg