The Commonwealth Games might be over, but Australia is still earning gold medals in the field of economic performance.

A mining boom followed by a housing boom in Sydney and Melbourne have helped the nation achieve a record 26-year-long expansion, making the “Lucky Country” the envy of the developed world. Yet with the mining boom over and the housing boom now apparently cooling, which sectors might pick up the slack to ensure the good times continue?

In Morningstar’s “Forecast 2018” report, Peter Warnes, head of equities research, noted Australia had been a major beneficiary of China’s emergence as the world’s second-largest economy, helping to boost resource exports, led by iron ore and coal. He pointed to services exports as being the next major driver as China transitions from an investment-led to a consumption-driven economy.

“Australia must now recognise the transition within the Chinese economy and adapt to benefit from China’s consumerism and service-driven future…[We] must embrace the opportunities the significant increase in demand for tourism, education and healthcare present. Demand for these services has the potential to match resources exports before 2025,” he said.

In a recent presentation in Melbourne, Capital Economics’ Paul Dales said the mining boom from around 2010 to 2013 had powered business investment, which was succeeded by a housing boom that lifted consumption and dwelling investment.

While the next period “is still in its infancy,” Dales suggested that subdued wages growth and weak housing markets would restrain consumption and keep GDP growth at around 2.5 per cent this year and next, “rather than the 3 per cent or so expected by most other economists and the RBA [Reserve Bank of Australia]”.

“Low wages growth also explains why we believe the RBA is being too hopeful in expecting underlying inflation to rise to its 2 to 3 per cent target range…there is simply no need for the RBA to rush to raise interest rates,” said Dales, who predicted the first interest rate hike would not arrive until “late in 2019”.

“This year will probably be the second year in a row that Australia grows no faster than either the United States or the Eurozone. That hasn’t happened since Australia was last in recession in 1991 and helps to explain why the RBA will lag the global interest rate cycle,” said Dales, chief Australia and New Zealand economist for the London-based consultancy.

Rosy outlook

“Over the next 10 years however, the outlook is better than in most other advanced economies and life after the mining boom could prove to be rather rosy. Of course, Australia won’t return to the heady rates of growth of 3.5 to 4 per cent seen in recent decades, particularly as China moves away from its heavy investment phase, but Australia will still grow at a much faster rate than its peers,” he said.

Like Morningstar’s Warnes, Dales suggested rising real incomes in China, India and other emerging Asian economies would lift Australia’s services exports as a share of GDP. At the same time, a growing population would provide further support for the construction sector, with Australia’s infrastructure spending currently only topped by China as a share of GDP.

He said the greatest opportunities would be in “services exports, construction and parts of finance,” with economic growth being “more balanced and arguably more stable”.

Justin Fabo, senior Australia economist, Macquarie Group pointed to an 18 per cent gain in non-mining business investment since the start of 2016 as evidencing the economy’s transition towards new growth sectors, principally infrastructure.

He suggested an improving global economy provided a favourable backdrop for the Australian economy, even without a boom.

“The big story of the last six-and-a-half years has been the fall in commodity prices, which was a big nominal drag on the economy, and our labour cost base has had to realign after getting out of whack vis-à-vis productivity growth. That’s been slowly happening and is still happening. Coupled with the unemployment rate remaining above ‘full employment,’ this means that any improvement in wages growth from here is likely to be protracted,” he said.

Asked where the next boom might come from, Fabo said policymakers preferred sustainable expansions.

“There will be no boom--and you don’t want a boom, as they’re too problematic. However, looking at the next growth sectors, in the near term the clear standout is infrastructure,” he said.

“Even in the long term, if you think we’re going to maintain population growth anywhere near where it is at present, demand for relatively high infrastructure spending will remain strong. As long as that can be paid for, the infrastructure story is not going to go away for the next 10 to 15 years or longer”.

Fabo also pointed to further expansion in dwelling construction due to population growth.

“Interest rates will play havoc with the housing cycle as always, but housing construction has to remain reasonably elevated given that immigration is now heavily skewed to younger people, which tends to boost housing demand,” he said.

“The other area is services such as health, education and innovation--there will be continued strong demand for all three”.

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Glenn Freeman is a Morningstar senior editor, based in Sydney.

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