Here's how the global economic slowdown will affect Australia

Thu, 22 Nov 2018  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/heres-global-economic-slowdown-will-affect-australia-204836678.html 

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Here's how the global economic slowdown will affect Australia

There are a few worrying trends unfolding in the global economy, ones that threaten to have a negative impact on Australia into 2019. The question now is how significant the slowdown in global economic growth will be, and how will it show up in the Australian economy.

Some facts first.

In the September quarter, GDP fell in Japan and Germany and it has weakened in all other major countries, including China. The leading indicators on business sentiment and housing, which pre-empt economic conditions, point to the December quarter also being weak across the world. It is a scenario that has financial markets repricing stock markets, commodity prices and expectations for interest rates.

The reasons for the global slowdown are varied.

An important issue is the US Federal Reserve lifting interest rates over the past couple of years. These interest rate hikes are permeating global bond markets and business conditions. Note the recent lift in Australian mortgage rates outside any move from the RBA to see how the rise in interest rates in the US can flow around the world. The US economy is also starting to fall foul of the Trump tax cuts, which are now fading and have left the US with a government debt level that will be very difficult to contain.

When the US tax cuts were delivered, there was a $1.5 trillion sugar-hit to the economy. With the new and lower tax scales embedded into the economy, there is no second round effect on the economy unless taxes are cut again. This will not happen which will mean the rate of growth moderate. In China, there is a mix of high debt and excess supply of property, which is undermining current economic conditions which has seen growth slow to around its weakest pace in 20 years. The authorities are so concerned about the growth outlook that it has depreciated the Chinese currency, the yuan, and has otherwise eased monetary policy. This policy easing is aimed to support exports and underpin domestic investment levels.

In the Eurozone economy, which is actually larger than the US, a mix of Brexit issues, entrenched rigidities in markets and the backwash from the slowdown in China are all impacting. As a sign of the troubling economic conditions, the European Central Bank still has negative interest rates in place.

Amid all of this is the trade war sparked by US President Trump and his thoroughly misplaced concerns about the US international trade position. As tariff barriers are rising, trade flows are slowing and with that, new economic activity is sliding. The escalation of the trade war will continue to undermine confidence. The recent sharp falls in commodity prices is an important barometer of global economic growth. With the major commodity indexes down by between 5 and 10 per cent in the last 3 months, it suggests that global manufacturing is cooling.

For Australia, this is not good news.

GDP growth will almost certainly slow from the current 3.4 per cent and it set to drop back to around 2.5 per cent. This is not just on the back of the global growth outlook, but also for a range of domestic reasons. The fall in house prices is hurting consumer spending, new housing construction is falling and household spending is being constrained by on-going subdued growth in wages, low saving and high debt.

It looks like there are tough times ahead for the Australian economy with the recent global slowdown emerging as the latest point for concern.

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Thu, 06 Dec 2018

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/dont-fall-spin-scott-morrisons-budget-surplus-no-certainty-224422761.html 

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Don’t fall for the spin - Scott Morrison’s budget surplus is no certainty

Prime Minister Scott Morrison could yet be guilty of prematurely declaring that his government will deliver a budget surplus in 2018-19.

Sure, tax revenue is growing at a rapid pace and the government is underspending on a range of government services, but there are still seven long months to go between now and the end of the financial year that might yet blow up the surplus commitment.

PM Morrison’s ‘return to surplus’ boast is based, it appears, on hard data for the first four months of the 2018-19 financial year on revenue and spending information from the Department of Finance. These numbers do look strong, at least in terms of the budget numbers and if the trends on revenue and spending continue, the budget will probably be in surplus. Treasury will be factoring in ongoing economic growth, no increase in the unemployment rate and buoyant iron ore and coal prices over the remainder of the financial year. These forecasts and hence the budget bottom line are subject to a good deal of uncertainty, as they are every year.

If, as is distinctly possible, the economy stalls in the March and June quarters 2019, commodity prices continue to weaken and if there are some unexpected increases in government spending, the current erroneous forecasts for revenue and spending could leave the budget in deficit.

Change of view on monetary policy

Wed, 05 Dec 2018

In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates.

For some time, I have been expecting the RBA to cut the official cash rate to 1.0 per cent, a forecast that has been wrong (clearly) given its decision to leave rates steady right through 2018.

That said, it has been a highly profitable call with the market pricing interest rate hikes when the call was made which has yielded a decent return as time has passed.

My updated profile for RBA rates is:

May 2019 – 25bp cut to 1.25%
August 2019 – 25bp cut to 1.00%
November 2019 – 25bp cut to 0.75%

The risk is for rates to 0.5% in very late 2019 or in 2020

It will be driven by:

  • Underlying inflation remaining below 2%
  • GDP growth around 0.25 to 0.5% per quarter in 2019
  • Annual wages growth stuck at 2.5% or less
  • Global growth slowing towards 3%
  • Labour market under-utilisation around 13 to 13.5%

There are likely to be other influences, but these are the main ones.

AUD, as a result, looks set to drop to 0.6000 – 0.6500 range.