Goldilocks comes out to play
Business Outlook Q1 2018
23 April 2018: Tariff wars be damned. The real story is excellent global growth, evident throughout the globe. US tax cuts are helping, as are global interest rates, which remain near record lows. In addition, Asia has been adopting reforms, the world’s infrastructure spending is gaining ground, and good global growth tends to see Asia shine, as it plays to Asia’s trade strengths. So Global Goldilocks – who first came out to play in early 2017 – looks set to stay in party mode throughout 2018. Yet a raft of challenges remains. Notably, global debt has been sprinting, so there’ll be pressure on some industries and some economies as the slow climb in the cost of capital continues. And the most immediate risk is that 2018 sees a descent into a global trade war that hurts all and helps none. But that is still a pretty small risk – and the much more likely outcome is a happy one: that Asia will again lead global growth in 2018. That’s good news for Australia and Australians.
So the globe is doing Australia plenty of favours. The bad news of huge falls in mining-related construction has past, and the long-awaited pick up in wage gains is beginning, spurred along by good profit growth and by the scorching pace of job gains. That’s an excellent combination. Yet although Goldilocks is evident in a business backdrop that simultaneously boasts a strong global economy and weak global inflation, it’s unlikely that Australia’s economy will take that love to town. Yes, the backdrop is great, and that’s one reason why investment is now on an upswing. But we sandbagged the economy from a sharper slowdown in recent years by cutting interest rates to the bone. That has left our consumers stretched and housing prices silly – which suggests consumers and homebuilding will therefore provide less support to growth in 2018 and 2019 than they did in 2016 and 2017. So Australia’s outlook remains good, but seems likely to fall shy of being great.
Inflation isn’t dead – it’s sleeping. That sleep remains deep, with upstream indicators of price pressures (demand, labour costs and import prices) all still quiet. But keep an eye on wage gains in the US and the cost of Chinese manufactured goods, as the ‘lowflation’ seen around the world may be starting to draw to a close, and those two indicators will be the canaries down the global inflationary mine. There’s potential for sales strength to combine with a gradual recovery in labour costs and a blip in import prices to see more inflation in Oz. But, like wage gains, that lift won’t be much, or soon.
It’s happening: ever so gently, central banks from China to Canada and from the US to the UK are turning off the taps on the long lasting blast of the cheapest credit the globe has ever seen. This won’t be speedy, but it is inevitable – the world economy is increasingly repaired from the global financial crisis, so emergency interest rate lows are now creating more problems than they’re solving. Australia will be slow to join this party. Inflation is no short term threat here, and the RBA has time on its side, so we don’t see the first rate rise until early 2019. Even more importantly, any rate rises here will be well flagged – Australia’s families are up to their eyeballs in debt, and the Reserve won’t want to spook them (or our botoxed housing prices). And Oz being a laggard on interest rates is one reason why we think the $A may yet ease a bit further, though not by much.
Beware fake news: don’t get sucked into thinking that a global trade war will blow up either our economy or our balance of payments. Although today’s trade war could worsen, to date its likely impact is still small bikkies. That leaves the dominant driver of trade trends being resurgent world growth. In turn, that’s why we see today’s trade surpluses lingering through to mid-2019.
Job growth continues to sprint at full pelt, with strong gains in full-time work – an area that’s lagged for years. That’s tempting people back into the job market, but hasn’t yet made much of an impact on wages. But the tide is turning, albeit slowly so. Both these key trends are set to change course across the coming year, with job growth fading a little as wage growth gradually gathers steam.
Improving global and local economies are raining revenue on the Federal Budget. Even better, ‘lower-for-longer’ global inflation is keeping interest rate hikes at bay, leaving housing markets as big contributors to State revenues. So the long-awaited surge to surplus is a happening thing. But what the economy giveth, the politicians are planning to promise away. The Government says it will cut personal income taxes, while Labor is raising other taxes so as to match the Government with something similar.
That’s great, huh? Except the last time that the economy did the Budget favours, the nation’s politicians (both Coalition and Labor) promised that away too. That was a mistake of historic proportions – that boom eventually fizzled, leaving huge deficits in its wake. Let’s hope that the rush to a new set of promises won’t also prove equally problematic down the track.
The tussle at the top
Australia’s industry landscape is moving. Mining is amid a gas-fuelled lift off in output but, outside that, Australia’s industry leader board is pretty much dominated by surging service sectors:
- The great growth in health care is being driven by our ageing population and by the rollout of the National Disability Insurance Scheme;
- Tourism by fast growing numbers of international visitors;
- Finance by super cheap interest rates;
- Information services by the proliferation of new technologies;
- Business services by corporate transformation, often in response to new technologies;
- And education by more Australian teenagers and by the rise of Asia’s middle class.
Then there’s the “left behinds” – those sectors that are struggling:
- Although manufacturing looks better than usual, that’s barely enough for it to do a lap around its sick bed.
- And the utilities remain beholden to Canberra’s inability to compromise – why invest in expensive long term assets when you expect the rules governing the profitability of those investments to be arbitrarily re-written every few years?
- Lastly, the property sector has finally returned to a low growth environment.
Australia’s two-speed split continues to narrow at the state level
State growth differentials are continuing to close. On the one hand interest rates remain cheap as chips, which is giving both NSW and Victoria some extra wriggle room. On the other hand, China is handling its transition well, which de-risks Western Australia and Queensland, allowing both of them the chance to recover – a path that Queensland is already treading.
Both Tasmania and South Australia are also performing better than usual – so much so that South Australia may wrest the title of ‘fastest growth in the nation’ this year from the ACT. Like WA, the Northern Territory is struggling with a pothole in its growth, but the NT has further to go before full recovery.
NSW is in a sweet spot: interest rates remain really low, the State is splurging on much-needed infrastructure, and businesses are opening their wallets. But Sydney’s housing boom saw it borrow growth from the future, so there’ll be an eventual butcher’s bill for construction and retail to pay.
Alongside its powerhouse population growth, Victoria’s economy is moving pretty fast too – with those twin strengths closely intertwined. Yet while Victoria is excelling in its “people” story, its “productivity” story is less compelling, and living standards are ultimately determined by the latter.
People are voting with their feet, and their verdict is that Queensland’s economy is on the way back. In the past year Queensland overtook Victoria to receive the most interstate migrants of any State, while migrant numbers from overseas to the Sunshine State continue to rise as well.
South Australia continues to sprint. SA may be Australia’s fastest growing economy this financial year, as the State racks up its best growth since before the global financial crisis. But some of today’s positives may not last, whereas challenges in energy and manufacturing may linger longer.
It was great. Then it was ugly. And now the sun is breaking back through the clouds again. Western Australia’s economy has been on a huge rollercoaster ride. Yet although a bunch of indicators remain weak, the tide has turned, and the State’s economic outlook is on the improve.
Success breeds success. Tasmania’s better economic news is feeding better news on population growth – which is itself feeding back into better news for the State’s economy. That’s now evident in everything from housing prices to international tourist numbers – both of which are running hot.
With the Ichthys LNG project now in an export rather than a construction phase, the Northern Territory’s economy has been doing it very tough, though the Territory should get clearer air from here on in. As of today, however, there’s still relatively little good news to point to.
Top of the leader board: Canberra’s economy has been sprinting, with the ACT recording the fastest growth of any State or Territory last financial year. And the risks – the Feds could tighten spending, or shift some staff – remain merely risks. As of right now, Canberra is looking solid.