The document provides economic forecasts for Australia and internationally in 2016 from ANZ economists Justin Fabo and Tom Kenny. Some key points: - For Australia, forecasts include the AUD falling to US64 cents, interest rates of 1.5%, a 11% decline in business investment, household consumption up 2.8%, and inflation of 1.5%. - International forecasts include modest growth for China and the global economy, a continued economic recovery in the US, and low inflation across developed economies. - Downside risks to the Australian economy include a sharper than expected fall in commodity prices and housing market downturn. Upside risks include stronger non-mining investment and growth in Asia improving terms of trade

1. 2016 Business Forecast
Terms of trade squeeze to keep growth modest

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Table
of
Contents
Introduction
...........................................................................................................
3
Chapter
1:
Key
economic
indicators:
forecast
for
2016
...........................................
4
ANZ’s
key
forecasts
for
2016
........................................................................................................................
4
What
is
your
forecast
for
the
AUD
in
2016?
...........................................................................................
5
What
is
your
forecast
for
Interest
Rates
in
2016?
...............................................................................
6
What
is
your
forecast
for
Business
Investment
in
2016?
.................................................................
7
What
is
your
forecast
for
Business
Credit
in
2016?
............................................................................
8
What
is
your
forecast
for
Overall
Household
Consumption
in
2016?
........................................
9
What
is
your
forecast
for
Wages
in
2016?
............................................................................................
11
What
is
your
forecast
for
Employment
in
2016?
...............................................................................
11
What
is
your
forecast
for
Inflation
in
2016?
........................................................................................
12
Chapter
2:
Economic
outlook
and
its
impact
on
SMEs
in
2016
...............................
13
What
is
the
outlook
for
the
Australian
economy
in
2016
and
what
are
the
implications
for
Australian
business?
................................................................................................................................
13
What
are
the
downside
risks
for
the
economy
in
2016?
................................................................
17
What
are
the
upside
risks
for
the
economy
in
2016?
.......................................................................
18
Chapter
3:
International
economic
outlook
in
2016
...............................................
19
What
is
the
outlook
for
the
international
economy
in
2016?
.......................................................
19
What
is
the
outlook
for
the
Chinese
economy
in
2016?
..................................................................
22
What
is
the
outlook
for
the
United
States
economy
in
2016?
......................................................
26
What
is
the
outlook
for
the
European
economy
in
2016?
..............................................................
29
Disclaimer: The information contained in this eBook is general in nature and should not
be taken as personal, professional advice. Readers should make their own inquiries and
obtain independent advice before making any decisions or taking any action.

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Introduction
Welcome to the third annual JPAbusiness Business Forecast eBook. This
year we are delighted to have two ANZ economists contributing to our eBook:
Justin Fabo and Tom Kenny.
Justin and Tom are leading Australian economists and we are very fortunate
they have agreed to share their views on the Australian and international
economic outlook for 2016.
Below is a brief introduction to our guest contributors:
Justin Fabo is Senior Economist in ANZ’s
Australian Economics team. In addition to
researching developments in the labour market
and demographics, Justin focuses on
Australia’s trade and investment corridors. He
communicates the research team’s views to
investor, institutional, corporate and commercial
clients, and has co-authored ANZ reports on
ASEAN: The Next Horizon, Sleeping Giant:
China’s Consumer and the China-Australia Free
Trade Agreement. Prior to joining ANZ, Justin
worked for the Reserve Bank of Australia and the Federal Treasury.
Tom Kenny is Senior Economist in ANZ’s Global
Economics team. He provides research and
analysis of the international economic environment
for ANZ’s corporate and institutional clients. Tom
has over 20 years’ experience in the field of
economics and finance. Before joining ANZ, he was
Chief Economist at Nomura Australia, where he
provided clients with insight into the Australian
economy, foreign exchange and interest rates. Tom
also spent 10 years working at the Commonwealth
Treasury and the Reserve Bank of Australia.

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Chapter 1: Key economic indicators:
forecast for 2016
Comments by Justin Fabo
Senior Economist, ANZ
ANZ’s key forecasts for 2016
• Aussie dollar – US 64 cents by the end of 2016
• Interest rates – 1.5% (RBA cash rate)
• Business investment – down 11% (includes mining and non-
mining, adjusted for inflation)
• Business credit – up 4.5%
• Overall household consumption – up 2.8%
• Wages – up 2.3%
• Employment – up 2%
• Inflation – 1.5%
Figure 1: Australian dollar Source: Bloomberg, ANZ Research

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What is your forecast for the AUD in 2016?
The Aussie dollar has already fallen nearly 40 cents against the US dollar
since its peak of $1.10 in 2011, and it has continued to fall over the past 12
months. The main driver of that fall is commodity prices, or Australia’s ‘terms
of trade’.
The terms of trade is the medium-term anchor for the currency and we expect
commodity prices to remain under pressure in 2016, so that’s the key
reason for our forecast for the AUD to be in the mid-60s by the end of 2016.
The other reason for our forecast is that we expect interest rates here to
fall a little further, whereas interest rates in the US are starting to go up.
The interest rate differential can also be an important driver of the currency
and it is looking to be less in favour of the Aussie dollar in 2016.
Figure 2: Australian dollar short run Source: Bloomberg, ANZ Research

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What is your forecast for Interest Rates in 2016?
This is a controversial one because there are only a few economic houses
calling for interest rates to fall a little further, and ANZ is one of them. The
majority are forecasting rates to stay flat throughout 2016 (at the time of
writing in mid-December 2015).
We have forecast the RBA cash rate will fall to 1.5% because we think the
economy – particularly the unemployment rate and the non-mining economy –
could do with a bit more of a nudge. One way to do that in the short term is
through modestly lower interest rates.
Inflation is no barrier to that as it’s around the bottom of the RBA’s 2-3%
target band and they have said they have scope for easing. Housing market
activity has also cooled in the major cities, removing an important hurdle
for further rate cuts.
Figure 3: RBA cash rate expectations Source: Bloomberg, ANZ Research

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What is your forecast for Business Investment in
2016?
There are two parts to this – mining and non-mining – and they’re both pretty
weak. In terms of actual numbers, mining investment is still falling and
that’s the big contributor to the 11% fall in business investment we have
forecast.
That fall is playing out as expected in the mining sector and it has another 18
months to two years to run. It is a drag on the economy, but that drag is
currently probably as bad as it will get.
For non-mining business investment, however, the story is a bit more
interesting. Non-mining investment has been pretty weak since the GFC for
various reasons, one being that the goods part of the economy, which is more
capital intensive, is quite weak, whereas the services part of the economy,
which is more labour intensive, is doing okay and supporting growth.
Figure 4: Business investment Source: ABS, ANZ Research

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We and the RBA have become more relaxed about the weak business
investment story because we’re seeing jobs growth instead, and we expect
that growth to remain pretty services driven over the next year.
The forward-looking indicators are saying there won’t be any pick-up in non-
mining investment, so we’ve still got a relatively flat outlook there for 2016.
Total business investment (includes mining and non-mining,
adjusted for inflation):
• 2014 – down 4.2%
• 2015 – expecting fall of 10%
• 2016 – forecast fall of 11%
What is your forecast for Business Credit in 2016?
We have forecast 4.5% growth, which is a bit better than what we’ve seen
over the past couple of years but, given the weak starting point, it’s not much
of a recovery.
The actual numbers coming in on business credit growth have improved in
recent months and we see that modest improvement continuing. This has
been driven by more activity around borrowing for property, mergers and
acquisitions activity, but the flat outlook for business investment means we’re
unlikely to see firms going out and borrowing at a much faster rate.
Our own data at ANZ shows a number of businesses still getting their balance
sheets in order and paying down debt, so that’s limiting the pick-up in
business credit growth as well.
Business credit growth:
• 2013 – 1.5% growth
• 2014 – 3.6% growth
• 2015 – expecting 5.6% growth
• 2016 – forecast 4.5% growth

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Businesses are also still saying ‘we’re not investing because we’re just
making sure the pick-up we’re seeing in spending is going to last’. They’ve
been saying that for two or three years so it’s possible this conservatism story
is actually just ‘normal’.
(It’s a similar story for households. Household confidence is actually around
the long-term average but spending growth is below average, so it feels like
things are simply different now than they were pre-GFC.)
Figure 5: Household income versus consumption growth Source: ABS, ANZ Research
What is your forecast for Overall Household
Consumption in 2016?
Household spending is looking a little better, forecast to rise by 2.8%, but we
don’t see it being driven by much of a pick-up in wages growth. Instead overall
income growth looks a little better because we’re seeing some jobs growth.

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However, in this environment of falling commodity prices and weak national
income, we’re not seeing the jobs growth deliver as big an upside to
household spending growth as we might have otherwise.
We do see some spending improvements coming from the fact the currency is
lower and tourism has picked up. This means some retailers will benefit from
household spending being redirected back home, but there will also be a
benefit from spending by overseas visitors. That has been an important part of
the story over the past 12 months and probably will be in 2016 as well.
Overall Household Consumption Growth (adjusted for inflation):
• 2014 – 2.7%
• 2015 – expecting 2.6%
• 2016 – forecast 2.8%
Figure 6: Household consumption and non-mining business investment
Source: ABS, ANZ Research

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What is your forecast for Wages in 2016?
Wages growth looks like it’s bottomed out in recent quarters, at around 2.25%.
We’re forecasting more of the same – wages up 2.3%. Adjusting for
inflation, it means real wages are growing only very modestly and we see that
continuing for another year.
The big picture story is that ever since the terms of trade started falling, real
wages haven’t grown much. As long as the terms of trade keep falling, and
we think they will, businesses just can’t afford to give bigger pay
increases and, on the household side, job insecurity is still a bit elevated, so
people are not going to go out and ask for larger wage increases.
What is your forecast for Employment in 2016?
Employment growth has been pretty strong over the past year and most of it
has been in just a few service industries that are very labour intensive.
Jobs growth in that services part of the economy is probably a bit above
average at the moment, which is good news and has helped to keep the
unemployment rate pretty flat or even a little bit lower.

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The growth has been in household services industries such as health,
education and real estate, and hospitality due to increased tourism. Some
professional services firms have also been hiring, in part due to flow-on
effects from strong property markets. The easing of fiscal restraint by
governments has also meant it’s no longer a strong headwind to jobs growth.
For 2016 we see about 2% employment growth which is a little above
average and will be good for household confidence.
Most of the jobs are being generated in industries or occupations where
wages aren’t particularly high, however, such as hospitality jobs which tend
to have lower than average hours worked and wages. This means the overall
boost to household incomes is more modest. It should be a good news story
for youth unemployment, however, which is still high but has fallen a little
recently.
What is your forecast for Inflation in 2016?
When we look at inflation we tend to look at core or underlying inflation, rather
than headline inflation which is impacted by temporary factors, including
swings in petrol prices.
Headline inflation is expected to be about 1.5% in 2015 and the same in
2016, which is pretty low.
For underlying inflation we’re looking at about 2% or a bit below for 2016.
Either way it’s low inflation by Australian standards – at the bottom of the
RBA’s target range.
Globally there has been ‘disinflation’, or falling inflation (not deflation), and that
is keeping a lid on our inflation here. We’ve also had our own issues in
Australia regarding falling commodity prices and the effect that has on income,
spending and pricing, which also weighs on inflation.
All those issues flow through to create soft wages growth, which means there
is no inflation pressure on the cost side and that will continue.

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Chapter 2: Economic outlook and its
impact on SMEs in 2016
Comments by Justin Fabo
Senior Economist, ANZ
What is the outlook for the Australian economy in
2016 and what are the implications for Australian
business?
We see some further modest improvement in overall growth for the
economy in 2016. We’re looking at overall GDP growth of 2.3% for 2015,
although it’s running a bit faster than that now (mid-December). With that as a
starting point we’re forecasting about 2.7% GDP growth for 2016.
Figure 7: GDP growth forecasts Source: ABS, ANZ Research

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We still think that is not fast enough to result in persistent falls in the
unemployment rate, but it’s okay given some of the big challenges the
economy is facing. These are the same challenges we’ve faced for the past
couple of year: falling mining investment and falling commodity prices.
The big one is falling mining investment, which has another couple of
years to run. As far as being a drag on the economy, however, it’s probably
as bad as it gets at the moment.
Commodity prices are still falling, so that’s dragging on our incomes across
the economy. This means it’s hard to get significant upside surprises from
things like government spending, household spending and business spending.
The overall picture is more of the same: okay growth, not strong growth. If you
are in business it will depend which part of the economy you’re in as to how
you can expect to perform in 2016.
Labour market a bright spot
Even though the story hasn’t changed much over the past couple of years and
we only have ‘okay-ish’ growth at the headline level, the economy is
tracking along probably a little better than many feared a year or two ago.
The key reason is the labour market, which has turned out better than
expected over the past 12 months. The unemployment rate has fallen a little
to just below 6 per cent which is still too high, but it’s not rising.
We think further inroads into that might be limited in 2016, however even that
is a tricky one to predict because some of the indicators (job ads) are showing
it may fall a little further in the near term, which would be good.
Profit margins still tight
It is highly unlikely that many businesses are going to see renewed
pricing power in 2016.
Pressure on margins and costs is likely to continue, though probably not as
harshly as in the past couple of years.

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We’ve seen evidence where some businesses have been able to recoup
margins a little bit, but not a lot.
Businesses that can still find productivity improvements are the ones that
will see profit growth in the next year.
Falling currency has mixed impact
The currency usually acts as a bit of a shock absorber, so if it is being
driven down by lower commodity prices it tends to absorb a bit of that shock to
the rest of economy.
To understand how it does that the first thing to note is ‘why’ is it falling? In
this case it’s because our national income is still being squeezed by lower
commodity prices, which has a negative income effect for most people in the
economy.
However the falling currency absorbs some of that pain by making imported
goods and services more expensive, so some of our spending is redirected
back towards domestic businesses.
That’s of benefit to businesses to varying degrees depending on what industry
you’re in, and we’re definitely seeing it already, particularly on the services
side.
The falling currency also provides some support to exporters, however, given
the fact few small businesses export, it’s the import substitution effect that will
provide the biggest boost for most SMEs.
Services sector driving economy
Some businesses in services industries are doing quite well at the moment
due to some big forces supporting growth in that sector.
One of those forces is the fall in the currency, which is seeing a pretty big
turnaround in our services trade with the rest of the world and that is filtering
through to the services sectors in our economy. The big beneficiaries are
tourism and education, which are tracking quite nicely.

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Another force has been the strong housing cycle. The strong pick-up in
housing turnover and housing activity – not just prices – always has strong
flow-on effects to the rest of the economy, whether it be through spending in
manufacturing sectors that make materials, or spending on services like
finance and mortgage brokers, real estate professionals and so on.
We’re likely to see those two strong influences on growth – currency and the
property cycle – last another six to nine months before they will wane. It’s
then more difficult to see where the upside may come from in terms of other
factors to drive growth.
Figure 8: Dwelling construction outlook Source: ABS, PCA, ANZ Research

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What are the downside risks for the economy in
2016?
Because we’re a small economy we always need to look offshore and the big
risk offshore is any major hiccup in the emerging part of the world.
Some of these areas, particularly China, other parts of emerging Asia and
some areas of South America, including Brazil, have borrowed heavily in
recent years. Their debt levels have risen significantly so this issue around
leverage is important in some of these economies. If they’re unlucky, it could
get a bit ugly and Australia would feel the impact, particularly through even
weaker commodity prices.
The risks to our commodity prices are still tilted a little to the downside.
Figure 9: Terms of trade versus Australian dollar Source: ABS, ANZ Research

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What are the upside risks for the economy in 2016?
In terms of upside risks it’s possible that places like the US could continue to
surprise us in 2016. It’s still the biggest economy in the world, so any
improvement would be a positive for us.
Domestically, the biggest upside risk would come from the fact we may be
wrong on our labour market predictions and the strength we’ve seen in
employment growth could continue for longer than we think.
If that happens consumer spending in the economy may be a little stronger
than we think in 2016 and clearly that would benefit most businesses’ bottom
lines.

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Chapter 3: International economic
outlook in 2016
Comments by Tom Kenny
Senior Economist, ANZ
What is the outlook for the international economy in
2016?
ANZ is forecasting the global economy to grow at 3.5% in 2016 and 2017,
which would be slightly up from the current year.
A story of steady growth seems a reasonably benign story, but underneath we
see considerable cross-currents. Although prospects for advanced economies
are encouraging, there is a lot of uncertainty over the outlook for emerging
markets, particularly China.
Figure 10: World GDP Source: IMF, ANZ Research
-­‐1
0
1
2
3
4
5
6
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
%
1990-­‐2008
avg 2000-­‐2008
avg
forecasts

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Advanced economies unspectacular
We are optimistic about the outlook for advanced economies, however
the growth from these economies is far from spectacular.
In recent years we have witnessed a slowing in longer-term potential
growth. This reflects reduced productivity growth and demographic factors i.e.
ageing populations. So these economies’ longer-term growth prospects aren’t
as positive as they were a decade or so ago.
Figure 11: Advanced economies' GDP Source: IMF, ANZ Research
Uncertainty in emerging markets
Growth in emerging markets over the next couple of years is expected to be
well under historical averages. In part this reflects slower growth in China,
which is only natural after an extended period of exceptionally strong growth.
For ANZ, the biggest uncertainty over the global growth outlook revolves
around what is happening in emerging markets, in particular prospects for
China with its transition to a more domestic-focused, consumer-based
economy.
-­‐5
-­‐4
-­‐3
-­‐2
-­‐1
0
1
2
3
4
5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
%
1990-­‐2008
avg 2000-­‐2008
avg
forecasts

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Previously, the Chinese growth model was about investment and exports. It
was clear to the rest of the world what the knock-on effects were from this
growth model. In particular, it was a very positive story for commodity
producers and exporters like Australia and Brazil.
However, the knock-on effects for the rest of the world from China’s
transition to a more service-based and consumption-based economy is
a bit of an unknown.
One area in which many countries are starting to experience rapid growth is
inbound tourism from China. This is expected to continue to grow as more
Chinese migrate to the middle class.
However, in terms of other benefits to global trade from the rise of a Chinese
consumer, we are less certain.
Figure 12: Emerging economies' GDP Source: IMF, ANZ Research
0
2
4
6
8
10
12
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
%
1990-­‐2008
avg 2000-­‐2008
avg
forecasts

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What is the outlook for the Chinese economy in
2016?
ANZ is predicting China to grow by 6.3-6.5% over the next couple of years.
Although the headline number looks good, we probably don’t fully appreciate
or understand the implications of the changing growth drivers.
Figure 13: China GDP Source: CEIC, ANZ Research
For many years China has been building up a large domestic productive
capacity base which, in turn, has been supplying the world with a lot of
manufacturing and consumption goods. Going forward, this domestic
capacity is likely to be used increasingly to meet internal demand. Thus
there may be limited opportunities for the rest of the world to supply goods to
Chinese consumers.
In addition, the slowing in fixed asset investment will result in demand for
commodities cooling. This is already having pronounced impact on commodity
producers and prices.
0
5
10
15
20
25
30
Sep 2000 Sep 2003 Sep 2006 Sep 2009 Sep 2012 Sep 2015
%y/y
Secondary Aggregate Tertiary

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Ongoing volatility
China is currently undertaking a significant amount of reform, including
financial liberalisation. Inclusive in the latter reform is a move toward a more
flexible currency. It is difficult to envisage a scenario in which these reforms
can be undertaken smoothly, thus we expect to see some volatility in
global financial markets as a result.
Indeed, in 2015 we saw that turmoil in Chinese equity markets had negative
spill-over implications for other financial markets. In addition, a relatively
modest revaluation of the Yuan in August had sizable ripple effects on global
currency markets.
What is the outlook for the Japanese economy in
2016?
(‘Abenomics’ refers to the stimulatory economic policies of Prime Minister
Shinzo Abe and is based upon three arrows: fiscal stimulus, monetary
easing and structural reforms.)
We’ve just finished our third year of Abenomics and the first two arrows,
particularly monetary policy, have had some success in delivering
improvements in the equity markets and have also resulted in a significant
depreciation in the Yen to a level which Japanese authorities think is fair value.
What has been disappointing is the third arrow – the reform arrow – which is
about lifting the longer term growth potential of Japan.
Abenomics trying to halt shrinking workforce
Abenomics is targeting 3% nominal growth over the next five or so years
and to deliver on that they’re expecting real growth of around 2%.
We believe their underlying real growth is more like 0.5%, so the
government will need to deliver much more quickly on reform if they are to get
anywhere near their target.

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Japan has an ageing and shrinking population, so they need to stop the
population shrinking and encourage more people into the workforce. Prime
Minister Abe has pledged to stop the population slide at a level over 100
million – it is currently 127 million.
Figure 14: Japanese population Source: IPSS
To boost population the government could consider immigration. Although
there is openness to some specialised skilled immigration, there is unlikely to
be acceptance of a broader program any time soon. Instead Prime Minister
Abe is promoting other ways to stabilise the population, including encouraging
fertility.
To support more women back into the workforce, the government is
introducing better childcare facilities. The government is also aiming to bolster
the health and aged care industry so people caring for elderly relatives can
return to work.

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Pushing for productivity
Many domestic-focused industries in Japan are inefficient, so part of
Abenomics’ goal has been to open up the domestic economy to outside
forces in an effort to boost productivity. Prime Minister Abe has pushed
hard for Japan’s inclusion in the Trans-Pacific Partnership (TPP), as he
regards this as an opportunity to make the Japanese economy more
externally focused and more dynamic.
The government has also implemented some reform in the electricity industry,
which has been heavily regulated. However, there hasn’t been much more
concrete done on structural reform as yet.
Overall economic outlook positive
Broadly speaking the Japanese economy looks okay. The government and
Bank of Japan have been arguing for a while that there is a ‘virtuous
cycle’ falling into place and ANZ would agree.
The outlook for business spending is positive amid record profitability. In
addition, prospects for consumer spending are encouraging as real wages are
rising owing to very solid labour market fundaments. The increase in real
wages is coming after an extended period of negative growth, which is very
negative for consumption.
All up the outlook for the Japanese economy is positive but, that being said,
ANZ only expects GDP growth of around 1% over the next couple of
years.
Future issues for Australia
One issue for Australia in the longer term centres around supply of liquid
natural gas (LNG) and coal.
Japan is one of the leading manufacturers of coal-fired power stations but
they’ve made announcements recently about cutting back on this investment
as a commitment to cleaner energy.

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Although they’re planning on reopening their nuclear reactors after they were
shut down after the Fukushima accident, this will take a long time, if it
happens at all.
Thus it is a reasonably positive story for Australian gas producers, but less so
for coal exporters.
What is the outlook for the United States economy
in 2016?
ANZ is looking at GDP growth in the US of 2.25% for the next couple of
years, which would be slightly higher than its trend.
A major issue facing the US economy in 2016 will be the tightening of
monetary policy by the US Federal Reserve (Fed). This will be the US
economy’s first taste of higher interest rates in nearly a decade and how
households and businesses react will be a key dynamic for the economy.
What we do know is that the Fed will raise interest rates very gradually and
thus monetary policy will remain very accommodative for some time, given
that rates are coming off zero.
As Justin said in the previous chapter, the US economy is still the biggest
in the world and US consumers are significant buyers of imported
goods and services. For these reasons improvements in the US economy
always have positive flow-on effects in Australia.
Rising inflation pressures
Could 2016 be the year we see a notable pick-up in inflation in the US?
Unemployment in the US is down at 5% which is close to full employment, or
the natural rate of unemployment. When the US labour market has
approached this point in the past, typically we start to see a pick-up in wage
pressures. This is turn puts upward pressure on inflation.

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For now US inflation is relatively subdued as domestic-sourced prices are yet
to pick up in a meaningful way. Meanwhile, US dollar strength and subdued
global prices are pulling US inflation down.
The US Fed believes the latter dynamics are just transitory and will fade, and
that inflation will likely quicken as domestic price pressures become more
pronounced. However, there remains some uncertainty about how long these
‘transitory’ forces will continue to hold down inflation.
Inflation will be key to Fed monetary policy deliberations in 2016. Should
inflation evolve more slowly than the central bank is forecasting, policy will be
tightened far more gradually. Conversely, if inflation grows more quickly than
the central bank is anticipating, policy will be tightened more rapidly.
Potential for growth in capital expenditure
Of interest is whether there is potential for a surprise in business capex.
For a number of years US businesses have been focusing on their capital
structure. Companies have taken advantage of low-cost debt to buy back
equity. As a consequence, business investment has been relatively subdued.
Given that the US economy is returning to more normal conditions and the
labour market is getting tight, it could be a year that capital expenditure might
surprise. This would be a positive upside risk for the US economy.
Opportunities in the housing market
Another positive risk for the US economy is the housing market. We still
haven’t seen housing activity return to ‘pre-crisis levels’ so there remains
potential for positive growth surprises in this sector.
New housing supply coming onto the market is well below what is required by
the demographics. Typically, over the long run, roughly 1.5 million housing
starts are required per year. Currently the US is building just fewer than 1.2
million houses, still 25% below its long-term needs, thus indicating there is
still potential for the housing market to improve.

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Downside risks for the US and Australian exporters
In recent times a number of Fed officials have been highlighting that US
job growth is set to slow now the economy is close to full employment. This
is because there is less labour supply.
Slower employment growth means less household income and thus softer
consumption and overall GDP growth.
Figure 15: US unemployment rate Source: BLS, FOMC, ANZ Research
3
5
7
9
11
80 85 90 95 00 05 10 15
%
Fed
estimate
of
"NAIRU
"4.9%
to
5.2%

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What is the outlook for the European economy in
2016?
The EU had a double-dip recession coming out of the GFC. Currently growth
is looking the best it has for a number of years and the prospects are relatively
positive. ANZ is expecting the Euro area to grow by around 1.5% over the
next couple of years.
That being said, the EU still has some ways to go to repairing their economies
in terms of lost output, lost jobs and so on. This means there remains a
sizable amount of unemployed resources in Europe. As a consequence
inflation pressures are very subdued in the Euro area.
ANZ expects that the European Central Bank (ECB) will keep monetary policy
highly stimulatory for a considerable period. Indeed, the central bank will
continue to hold an easing bias for some time given that both headline and
core inflation are expected to undershoot its price stability objective of just
under 2% for the next year or so.
Domestic drivers looking positive
On the positive side, many domestic drivers in the European economy
are looking increasingly more favourable.
We’re seeing a reasonable contribution from household consumption to
growth. Household spending is currently growing (1.7% year on year) at its
fastest pace since the GFC. This improvement reflects a couple of factors:
improved jobs market and an end to deleveraging.
More generally, a couple of major headwinds for growth have subsided. We
are now starting to see growth in private credit after a substantial period of
deleveraging by both households and businesses. In addition, the pace of
fiscal consolidation has slowed markedly.
The United Kingdom economy and currency has been doing very well,
so there are potentially a lot of positives for Australia in terms of tourism
from the UK.

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Geopolitical uncertainty
A potential ‘Grexit’ (Greek exit from the eurozone) seems less of a risk for the
region, though there remains a fair bit of work to be done to reduce Greece’s
elevated and unsustainably high debt.
A big issue for Europe in 2016 will be the ongoing refugee crisis and the
ability of the economies to integrate them successfully. The threat of
terrorism, the refugee crisis and the potential for more extremism in political
feeling towards immigration and settlement of refugees are all significant
issues which would further complicate an already difficult situation.