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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The RBA admits it stuffed things up – sort of

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According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.

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