From Deloitte today:
29 January 2019: Global growth is still sprinting, but it is increasingly showing signs of starting to run out of puff. The US continues to move fast, with its afterburners blasting away off the back of the huge tax cuts of late 2017. Yet that impact will fade, leaving US growth easing back amid higher interest and exchange rates. Japan will also have its own growth demons to deal with as the much-delayed hike in taxes on consumers hits home there in late 2019. And even though China has delivered a kitchen sink of stimulus amid the stresses and strains evident in an economy overly burdened by debt, that hasn’t stopped its growth continuing to slow – and that slowdown accelerated in recent months. Add in some evidence of slowing in Europe too (especially in Germany) and today’s excellent economic growth around the globe may be pegged back to rather more pedestrian rates through the course of 2019 and 2020.
Australia’s growth is solid and national income gains are strong, but the challenges are mounting. The combination of a mini-credit crunch, plus the drought and falling rates of housing construction will see growth pegged back during 2019. But not by all that much. The housing correction is occurring amid great job gains and falling unemployment, which makes it rather less dangerous than otherwise. And there’s known good news on the horizon: businesses look set to gradually expand their capacity at stronger rates, and that should be happening at about the same time as the current support to growth from growing gas exports finally starts to flag. Even better (especially for families), wage growth will continue to recover, albeit at snail’s pace. All things considered, that’s a pretty happy set of circumstances for Australian businesses and for Australian families.
Australia’s economy has been outperforming, especially so in job creation. Yet while our economy has outperformed, inflation hasn’t. That failure of inflation to dance to its usual drivers is far from being only an Australian phenomenon. It’s much the same story all around the globe. And nor do we forecast a rapid return to wage and price pressures in Australia: although wage growth is recovering, it is emulating the snail rather than the sprinter as it does so.
Wages are making arthritic gains around the globe. That will keep the uptrend in borrowing costs for governments intact, though they may not rise as fast in 2019 and 2020 as they did in 2018. And there may be even faster increases in borrowing costs for corporate borrowers and for those in emerging economies as risk spreads widen from their Sleeping Beauty phase. Here in Oz cash rates remain at 1½%, the lowest in half a century. And we don’t see them going any higher before 2020: banks have already clamped down on credit, wage and price inflation remains on a tight leash, and housing markets in Oz are too fragile to be rapped over the knuckles by rising rates. Meantime, with interest rates rising faster overseas than here, and with China’s stimulus likely to lose momentum, we see the Aussie dollar stuck in its new (lower) trading range for a while.
Trump’s trade wars remain a distraction in understanding recent Australian trade trends. Despite the drought, the current account has dropped to multi-decade lows as a wave of new resource exports benefit from a simultaneous surge in world pricing amid Chinese stimulus. That’s great, but it is probably also temporary. We see world prices for key Australian exports on the back foot over the medium term, while gradually rising interest rates will add to the cost of servicing our foreign debt. That combination will eventually see the current account climb once more.
Population and jobs are inextricably linked: you can’t mess with one without the risk you’ll muck up the other. And that’s what makes the debate around population and infrastructure, as important as it is, somewhat ineffective. Politics may demand using policy levers such as cuts to migration to fight problems such as overcrowding. But do that and you run the risk that an equally strong force – markets – will help ensure that the workers in demand are found from some other source.
There’s been a surge for surplus, but upcoming elections could see politicians make permanent promises off the back of temporary good news. Why might recent good news be a flash in the pan? Coal and iron ore prices aren’t better-than-budgeted because China is better-than-expected. Rather, they’re looking good precisely because China is weakening, leading that nation to pump stimulus into construction. That plays to the sweet spot of company profits and company tax here in Australia, but it shouldn’t lull you into a false sense of security as to where tax revenues head over time. Besides, bank profits are already weakening amid tightening lending criteria, and as rising global interest rates eat into loan margins. That combo could be kryptonite for company tax over the next few years.
It’s neck-and-neck for the fastest growing sector in the coming year, as big new gas projects start to hit nameplate production targets in mining and energy, and as a combination of the rollout of the National Disability Insurance Scheme plus a flurry of elections sees health care prospering.
But there’s a difference. Mining is on a sprint to a long awaited finish line, whereas health care is on a marathon of great growth as demographics, dollars and new technologies turbocharge that sector. And a bunch of other service sectors are also on the surge, ranging from those surfing the corporate change agenda (such as professional services), to those taking advantage of the opportunities on offer from new technologies (such as information services). Meantime Asia’s rise is still wind beneath the wings of both education and tourism / recreation.
Yet it isn’t all sweetness and light. Farmers won’t bounce back overnight from the current drought, while manufacturers are juggling the impact of rising gas bills and relentless import competition.
And then there’s the trio of finance, property services and construction, all of whom are victims – to a greater or lesser extent – of the current mini-credit crunch and the accelerating falls in property prices in Sydney and Melbourne.
Finally, save some sympathy for the utilities. Canberra’s inability to compromise has locked us into a policy landscape that’s more third world than first world. The Feds have had to give up on three different attempts to integrate energy and climate policy in the last three years, and don’t have the stomach to try again. Instead, they’re yelling and pointing fingers. That’s dumb. Energy companies may not be perfect, but yelling at them isn’t a substitute for a coherent energy policy.
That is poor analysis. A few points:
- global growth is falling fast not “sprinting”;
- China has not thrown the “kitchen sink” at stimulus. I hasn’t even cut the cash rate and has barely boosted fiscal spending;
- Aussie employment is a trailing indicator and is clearly going to follow softening Aussie growth down, as will business investment;
- wage growth is going to stall as domestic demand wanes;
- global interest rates are going to reverse down not up;
- immigration and jobs are not “inextricably” linked. Cut one and there’ll be an adjustment to different growth drivers such a a lower currency versus people pumped urbanisation;
- the Aussie cash rate is going to be cut not rise in 2020;
- energy investment is booming despite politics.
You get a big, fat FAIL, Chris Richardson.
