At the start of the year economists seem more divided than ever over Australia's growth outlook.
Will 2017 be a year of economic stagnation warranting more Reserve Bank of Australia rate cuts or will growth pick up, putting pressure on the central bank to tighten monetary policy?
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Lower growth, less revenue
Leading Australian economists are more pessimistic about the Australian economy than the official Treasury position. Peter Martin explains.
Last week, Goldman Sachs' chief economist Tim Toohey put the probability of a rate hike in November "somewhere in the 40s and rising" as last quarter's spectacular surge in iron ore and coal prices works its way through the economy.
Mr Toohey predicts gross domestic product will grow 2.8 per cent this year, rising to 2.9 per cent next year, and expects the RBA to lift rates three times in 2018.
At the other extreme is Credit Suisse economist Damien Boey, who on Tuesday put out a note predicting zero real GDP growth (nominal growth minus inflation) this year, sparking two RBA rate cuts in 2017.
Underpinning Mr Boey's gloomy forecast is a continuing slump in business investment exacerbated by an expected slowdown in housing construction as well as sluggish consumption growth due to a negligible rise in real wages and a weakening labour market.
"Our stagnation forecast might look a little extreme," Mr Boey said. "But we note that the partial indicators are not stacking up well for Q4 of 2016."
Following a shock 0.5 per cent contraction in third-quarter GDP, Mr Boey sees little chance of a rebound in the fourth quarter of 2016.
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On the demand side, he fears that "moderate growth in retail spending has been offset by weakness in the construction cycle".
Meanwhile, the trade surplus may have soared last quarter thanks to booming commodity exports, but Mr Boey cautioned that the record $3.5 billion surplus was mainly due to soaring prices, not rising volumes.
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"It appears that trade was a net drag on real GDP growth of around 0.3 per cent," he said, predicting that real GDP may have flatlined in the fourth quarter. The knock-on effects would mean that growth will struggle this year.
"Even with 0.5 per cent quarterly growth for the first quarter and the second quarter of 2017, year-end real GDP growth would slow to a meagre 0.5 per cent by mid-year because of negative base effects. All things considered, it is not hard to achieve a 0 per cent growth outcome for calendar year 2017."
Other economists have been more upbeat about the effects of the giant trade surplus, with NAB economist Tapas Strickland predicting it will add about 0.3 per cent to fourth-quarter growth and support the economy this year.
"The surplus reflects a positive story of higher commodity prices and rising export volumes, which should support economic activity in 2017," Mr Strickland said. "A string of further trade surpluses is likely over the first half of 2017 given higher commodity prices and increasing volumes.
"[The bumper numbers] should eliminate any fears out there that Australia was at risk of recording a 'technical recession' after the weak Q3 GDP figures.The trade balance may also make a credit rating downgrade by S&P; less likely."
While economists are divided over the contribution of trade to economic growth this year, they do agree that housing construction, which boosted the economy over the past year, has peaked.
"After housing activity rose consecutively for four years, its longest-ever boom, we now think that it has probably already peaked at over 6 per cent of nominal GDP," said George Tharenou, an economist at UBS.
If right, home building could make little net contribution to economic growth overall in 2017, after adding half a percentage point last year.
Most economists agree that next year will see growth picking up a bit. Even Mr Boey is more upbeat about 2018, predicting that real GDP will rebound to 2.5 per cent, not least thanks to RBA rate cuts and possibly some fiscal largesse.
"The federal government may become more comfortable with larger deficits, once it sees the need for greater spending, and is freed from the self-imposed constraint of preserving the AAA credit rating."
Credit Suisse is by no means the only bank predicting the RBA will cut rates this year to boost economic growth. Macquarie, for example, has been calling for more monetary easing for a while, citing stubbornly low inflation as a trigger for an RBA move.
"Our current base case is for two additional 25 basis point rate cuts from the RBA over 2017, on account of inflation continuing to disappoint expectations as internal demand remains sluggish and a high currency dampens imported inflation and the economy's transition," the bank's economists said.
Financial markets are sitting on a fence when it comes to the RBA's rates path. After earlier in the year cautiously pricing in a slim chance of a rate hike later this year, they now see a 12 per cent chance of a cut by September, according to Citi.
The Reserve Bank itself is for the time being sticking to its "glass half full" view of the economy.
In the statement accompanying its decision to keep the cash rate on hold at 1.5 per cent, governor Philip Lowe said the bank's "central scenario remains for economic growth to be around 3 per cent over the next couple of years".
He also noted that the third-quarter GDP contraction was most likely a blip, predicting a return to "reasonable growth" in the following three months.