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Economic Update

We can all give ourselves a pat on the back, because Australia is about to achieve an amazing feat.  The Australian economy has likely just equalled Holland’s record for the longest streak without a recession.

We can confirm this when data will be released in June. Indeed, we will very likely surpass this record later this year. A sensible policy mix, a diversified economy and some good luck are key reasons for Australia’s performance.

This achievement is particularly impressive when considering that it has been a challenging environment in recent years. A sharp fall in commodity prices has resulted in an unwinding of the mining investment boom and a difficult transition towards non-mining sectors of the economy.

Since the beginning of last year, commodity prices have rebounded. It provides a big benefit to the economy given that there is no longer downward pressure on incomes.

Nonetheless, the economy is currently growing at a pace which is less than ideal. We expect that economic growth this year will sit between 2 and 2.5%, below the average over the past ten years of 2.7%. At this pace, it would seem unlikely we will witness a meaningful decline in the unemployment rate.

As of March, the unemployment rate stood at 5.9%. It has fallen from a peak of 6.3% back in July 2015, but it is still not sufficiently low for us to expect that wage growth will pick up from its current pace.

The fact that the economy is stuck in third gear despite interest rates being at record lows is a source of frustration for the RBA. At the same time, there are concerns over financial stability risks as a result of the strength in the housing market, especially in Sydney and Melbourne. The heat in the housing market will probably prevent the RBA from providing any further monetary stimulus, even though new measures by APRA have been announced to mitigate some of these risks.

Still, the economy is not in terrible shape. Indeed, an economic growth rate above 2 per cent is a reasonable outcome in comparison to other advanced economies. Moreover, the chances of a recession are low.

Therefore despite the many challenges along the way and still some concerns for the outlook, the performance of Australia’s economy will be well worth celebrating. And we will have a world record title to prove it.

Words by Senior Economist, Janu Chan.