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The global and Australian economies have slowed notably over the course of 2019, amid rising geopolitical risks and uncertainty – and Australia’s economic growth looks to have averaged 1.8%, lower than the 2.7% in 2018.
Much of the Australian slowdown has been driven by local factors. Consumer confidence has dropped to a four-year low – in part because consumers have been more worried than reassured by the Reserve Bank’s interest rate cuts. Combined with high household debt levels, consumers are more cautious with their spending, and choosing to repay their mortgages faster. And while job growth has been solid, wage growth remains seriously stalled. So, despite the tax cuts and lower interest rates, the retail sector has taken a hit, and the earlier phase of falling house prices has seen apartment construction pulling back rapidly, further restraining spending.
But wait, there’s more. The severe and ongoing drought has also continued to weigh on business and consumer confidence, at the same time rising uncertainty is resulting in businesses becoming more cautious on investing for the future.
Figure 1: Contribution to Australian GDP growth (year-ended)
Amid the relative gloom, there have, however been some upside surprises.
Despite the global slowdown, the Australian economy has benefited from China’s construction sector stimulus which has helped support our exports, showing up as Australia’s first current account surplus in 44 years. Strong government spending – including on infrastructure in Sydney and Melbourne – has also played a role in supporting the economy.
And 2020: the year ahead?
So, what lies ahead in 2020?
Deloitte Access Economics’ central forecast for Australia is for economic growth of 2.1%, an improvement on the 1.8% estimated for 2019.
There’s stimulus already in play, including cuts to taxes and interest rates and a lower Australian dollar, and house prices are now roaring upwards once more. While not expected to rapidly turn around the housing sector and lead to a rebound in consumer spending, this price growth should help limit any potential housing sector pain for the economy.
Assuming no further global shocks or errant tweets (by certain US presidents), Australian growth should continue to eke out a gradual recovery
That’s the ‘most likely’ outcome. But downside risks to the economy could also materialise.
The largest risk to the global economy lies in the increase in uncertainty amid continuing geopolitical tensions. The ongoing US-China trade war (although slightly less tense after the weekend) and an increasing number of economies implementing inward-looking policies continues to weigh on global investment and growth. And elsewhere, tensions in Hong Kong, Kashmir and the Middle East are of concern.
A further worsening in geopolitical tensions could result in a harder hit to global confidence and activity. While policymakers around the world would look to prop up their economies, the size of monetary and fiscal ammunition available for deployment is now smaller than it once was. China, for example, whose past stimulus efforts have helped Australia, would find it difficult to provide stimulus of similar magnitudes. The fallout for the global economy, and subsequent falls in Australian exports would then be a risk to our economy, further weakening growth.
Importantly, these are risks rather than what Deloitte Access Economics expects. But we’ll all need to keep a ‘weather eye’ out in the year ahead.
This is our final Weekly Economic Briefing of 2019. Wishing you a safe and happy holiday season.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Jasmine has extensive experience as a macroeconomist. She has extensive experience in macroeconomic analysis and forecasting, econometric modelling and scenarios design/modelling. She is responsible for the Deloitte Horizon macroeconomic scenario model. Prior to joining Deloitte Access Economics, Jasmine has worked as a macroeconomist across the private and public sectors in Australia and Singapore.