Let’s start with some bad news.
It is pretty clear that dwelling investment (which makes up around 5 per cent of GDP) is set to fall by around 8 per cent in 2020. This means that by itself, we start my GDP build with a -0.4 percentage points on GDP (5 per cent times minus 8 per cent). That’s said, I am factoring in a housing construction rebound in the second half of 2020 as a supply shortage impacts property developers and house prices. That is a question that should see dwelling investment add to GDP in 2021.
• Impact in 2020: -0.4 percentage points
Now the good news.
Private capital expenditure
In terms of private capital expenditure, which accounts for around 12 per cent of real GDP, the Bureau of Statistics expectations survey points to strong growth in 2020. Based on the hard data on expectations, it looks like private capex will rise by 9 per cent as businesses are gearing up for a lift in non-residential construction and strong growth in spending on plant and equipment (note we have a technology boom globally still happening).
• Impact in 2020: +1.1 percentage points
Government consumption and investment
Government demand is spilt between consumption and investment – the latter includes some of the infrastructure boom being rolled out. Government consumption accounts for about 19 per cent of GDP while government investment is an additional 5 per cent. Based on government consumption growth of 3.25 per cent (very conservative given the NDIS roll out and more) and public investment growth of 6 per cent, government demand will contribute a hefty 0.9 percentage points to GDP.
• Impact in 2020: +1.0 percentage points
Net exports are a wild card. Export volumes are growing solidly and there is more upside in the output of gas and iron ore. Global economic growth looks like being firm which will help the export sector.
This will be offset somewhat by weakness on coal export volumes. In terms of services, the recent weakening in tourism and education may moderate. A hugely competitive Aussie dollar (and by that I mean anything under 75 US cents) and exports are likely to grow by around 6 per cent.
This nice addition to GDP will however, in my estimate, be more than completely offset by a surge in imports. That business investment lift, noted above, has a high import concentration, which means that net exports (exports minus imports) is likely to trim a small amount from bottom line GDP.
• Impact in 2020: -0.2 percentage points
At this point, when we add up the contributions to GDP, we have growth in 2020 at 1.5 per cent.
Of course, I have not yet covered the biggy for the economy – household consumption.
Household consumption accounts for around 57 per centre of GDP. It matters to the core growth rate of the economy. In forecasting household consumption, I plug in the following drivers – disposable income, employment, wealth and savings. With a bunch of rather conservative assumption on those fronts, I get household consumption growth of 2.5 per cent in 2020. With a bit of a push, I can get growth to 2.8 per cent, but for the sake of being conservative, I’ll stick with the 2.5. For something that is 57 per cent of GDP growing at 2.5 per cent, the bottom line contribution to GDP is 1.4 percentage points.
• Impact in 2020: +1.4 percentage points
Add this to the above calculations and GDP growth in 2020 falls out of my spreadsheet at a solid 2.9 per cent.
If household consumption is even a touch stronger (rising wealth), the dwelling investment cycle is less a drag as it turns higher earlier or net exports are simply neutral as resources export volumes continue to boom, then GDP growth in 2020 would be nearer 3.5 per cent.
This outlook is based, in part, on a scenario where the RBA delivers one final interest rate cut to 0.5 per cent and where the government marginally loosens fiscal policy before year end, including in areas of drought assistance or other spending measures.
Amid this, I note that in 2020 inflation remains around 1.8 per cent, the unemployment rate does not fall much and hovers near 5 per cent and wages growth stays around 2.3 per cent. There would also be upside if the Trump trade war issues moderate, as they probably will, China continues to deliver stimulatory policy and commodity prices drop only 10 per cent as opposed to the 20 per cent broadly assumed in my calculation.
At this stage, as there is a rush in the economics profession to embrace gloom and pessimism, my forecast looks to be an outlier, but as was the case over the past few years, I am very happy let my forecasts, not my prejudice and wish for media coverage, to win out.