This year is coming to an end with the Australian economy having experienced 12 months of divergent trends. Overall, the rate of economic growth has slowed, the unemployment rate edged upwards and inflation has eased, yet business conditions have remained buoyant despite the government announcing budget tightening measures to achieve a surplus.

The influence of global economic and market conditions on Australia have been generally negative this year, highlighted by sharp falls in commodity prices and loose monetary policy settings throughout the industrialised world. Persistent weakness in the Eurozone has created a drag on the global economy, including China which continues to experience a slowdown in its performance.

The good news globally has come from the United States, which has registered sustained GDP growth and an improvement in employment to levels that were last seen before the global financial crisis unfolded.

The year’s mixed story has seen the Reserve Bank of Australia hold official interest rates at a record low level throughout the year, while in recent months the Australian dollar has fallen to a five-year low.

For the credit industry and the business sector more broadly, 2015 appears set to deliver continued mixed news.

Despite the challenges of 2014, the business sector is looking at next year favourably. Dun & Bradstreet’s (D&B) latest Business Expectations Survey reveals that the corporate sector is upbeat on expected sales, profits and, to a slightly lesser extent, employment and capital expenditure. Encouragingly, there are signs that the non-mining side of the economy will lift its capital expenditure plans, although more substantial investment levels will be necessary to see overall growth improve next year.

Businesses will also be looking for an improvement from the consumer side of the economy, which has been problematic over the last 12-months. Despite record-low interest rates, consumers have been cautious in their spending and borrowing (outside of property), with weaknesses in the labour market, a record low pace for wages growth, and high levels of household debt proving major obstacles. Unsurprisingly, given these conditions, D&Bs Consumer Financial Stress Index has deteriorated over the past year as more Australians struggle to meet their current obligation or take on new credit.

Summing up these economic indicators, D&B is forecasting real GDP growth in 2015 at around 2.5 per cent, a little below the pace that is seen to be consistent with strong activity. With below-trend activity, the unemployment rate is likely to edge higher and could well exceed 6.5 per cent by the middle of the year. As a result, wages growth is set to slow to a new record low of around two per cent. Inflation is forecast to ease to around 2 per cent, with prices contained by the combination of a subdued economy, negative global influences and weak wages growth.

In this economic climate and with soft revenue growth, the government will struggle with its fiscal policy objective of returning the budget to surplus. Meanwhile, the RBA will most likely continue with a period of steady monetary policy – although if house price growth eases, the central bank would be inclined to be cut interest rates.

A wildcard for the economy next year is the Australian dollar. Reflecting the fall in commodity prices, the dollar has so far eased from peak levels around $US1.10 to around $US0.87, with further falls to a range of $US0.75–0.80 not out of the question. At this level, the sections of the economy that need to begin replacing mining sector output will benefit, including agriculture, manufacturing and Australia’s sizeable services industries. This outcome is significantly more realistic following Australia’s free trade agreement with China.

The bottom line is that the Australian economy is subdued and there may need to be more policy stimulus in 2015. While the business sector is optimistic and economic fundamentals stable, growth will remain below-trend in the near-term. On the upside, following years of slow economic progress since the global financial crisis, businesses are better placed to manage soft conditions and also exploit the opportunities that exist. Business-to-business payment times are the healthiest level since 2007, fewer operations are concerned about cashflow, and more startups are commencing operations.

The consumer position, however, has not improved and a divergence has developed between business and consumer outlooks. Whether businesses drag consumers out of their funk or whether the reverse occurs next year could be the decisive moment for the economy.

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