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Business Outlook

Slowdown bites, but not hard

15 April 2019: Most of the world is slowing. Trade tensions are feeding uncertainty, and businesses and consumers are saving rather than spending. That’s hurting the developing world in particular. For China, the trade shenanigans come atop the existing need to slow the growth in its debt anyway. Meantime Europe has slowed too, while a tax hike will weigh on Japanese growth by late 2019. And while US growth still looks good, it too has been slowing amid higher interest and exchange rates, and as the impact of tax cuts fades. Yet the global slowdown is modest. And it comes after two years of excellent growth. So although the news isn’t as good as it has been, it isn’t all that bad either: central banks are already on the job, and a number of governments are opening their coffers to support growth as well. That should limit downside risks.

A slowing global economy and a pick up in the pace of house price losses have trimmed Australian growth below trend. And that’s where it will stay in 2019 and into 2020. With house prices falling fast, consumers have become more conservative. And there’ll be fewer new homes being built – especially apartments. But don’t get carried away: this is a slowdown rather than something deeper and nastier. Although house price falls are hurting the economy, there are limits to that, partly because price falls are deepest where economies are strongest (in Sydney and Melbourne). Besides, prices rose so fast in the first place that shoppers never got too excited with their new-found wealth, meaning they aren’t pulling in their horns too deeply into the downturn either. However, slowdown it is. In addition, that weaker growth will mean slower job gains, and it may also see the recovery in wages – already slower than a wet week – slip sideways for a while.

There’s more of the same in store for inflation: a big, fat nothing. With oil prices having dropped, the Australian economy having slowed, and with wage growth barely breaking a sweat, Deloitte Access Economics sees headline and underlying inflation – presently a little under 2% – easing even further. Price pressures may lift a little once again through the course of 2020-21 as some of the dampeners of the moment become less drab: as oil prices steady, as economic growth navigates the house price crash of the moment, and as wage growth eventually resumes its painful climb upwards. Even so, the Reserve Bank has nothing to fear from inflation, and it doesn’t look like having to be scared any time soon. And the main reason why inflation isn’t going anywhere is because wage gains aren’t going anywhere either.

Key central banks have been running up the white flag: the threat of inflation has receded of late amid slowing economies, rising uncertainty and falling energy prices. Yet that risks the world being under-prepared for any future large challenges. Were another GFC to take hold at some time in the future, it would be easier to fight off if it began at a time of higher interest rates, leaving more firepower to fight off the downturn. The Reserve Bank has joined the rush to caution. It would take strong signs that unemployment was or would be heading up to convince the RBA to cut. Yet it is also clear that unemployment could go lower before wage gains went much higher, suggesting that this nation is also well away from circumstances that would dictate a rise in rates. That should leave the Reserve warming the bench for some time yet. With key central bankers cooling on the idea of normalising interest rates, some pressures on the $A have eased. That leaves the $A trading at close to fair value at current levels, and we don’t see it shifting too much in either direction.

The big beef between the US and China may have knocked the stuffing out of global trade, but it hasn’t laid a glove on Australian export earnings. The current account deficit is at multi-decade lows, partly because the Chinese construction sector is dancing to the beat of a stimulus drum, and we make big bucks selling into that. But China’s attempt to stave off an inevitable moderation in the pace of its growth won’t last forever.

Changes to immigration policy are now official, but they may not have much impact in the short term – the new official target has been the de facto target for over a year already – and migration was headed lower anyway (as a surge of students start to leave, and as more Aussies become expats). While much of what passes for national debate focuses on traffic congestion and on fears of losing jobs to educated foreigners, Australia has surged through this century thanks to the boost that migration has provided to our job market.

Just as the Feds find surpluses (and promptly spend them), the States are seeing their revenues melt away – with their stamp duties taking heavy hits amid the housing downturn, and with their GST taking collateral damage from the same thing (via a drop in apartment construction and a shift to caution among consumers).

Given that the Feds have shovelled some of their good fortune straight back out the door via tax cuts, overall fiscal finances (Federal, State and local) now look less flash, with the current improvement set to stall in 2020-21, and then to step backwards in 2022-23 as Federal tax cuts take an additional bite from revenues.

Performance is narrowing across States, but widening across industries

For a while Australia’s industries rode a collective wave of strong conditions. Other than poor long-suffering retail, most sectors were doing well. Even manufacturing, the biggest loser from globalisation, was enjoying something of a renaissance. But now industry fortunes are desynchronising. The sectoral winds are changing, with a starker difference between the current winners and losers in Australia’s economy, meaning the nation is showing some modest signs of being a ‘two-speed economy’ once more.

Among the winners:

  • The smart money is on health care to continue to shoot the lights out. The NDIS is boosting funding. And, that aside, an ageing population and electoral necessity will keep the funds flowing.
  • Professional services’ breakneck growth of recent years has slowed since an early 2017 peak, but may stay above average amid a big corporate change agenda and rapid technological change, while the public sector is swelling amid stronger government revenues and a range of State and Federal promises offered up amid the recent (and current) elections.
  • East coast governments are spending on infrastructure, too, while the miners are reviving a bit of investment spending amid a surge in export prices.

Yet it’s not such good news elsewhere:

  • The downturn in the Sydney and Melbourne housing markets is causing many sectors some pain. Housing construction has peaked and will fall further. But it’s not alone. The property services sector, which rode the housing market wave on the way up, is now doing the same on the way down.
  • With mortgages representing the bulk of bank loan books, growth in the finance sector is easing too.
  • Retailers, already seeing low income growth, are now wearing the effects of weaker demand for housing-related goods, while the wholesale and transport parts of the retail supply chain face the same pain.

So, depending on what sector you’re in, you might either be finding the current environment challenging, or be sailing along not understanding what people are complaining about – there is very little in the middle.

State growth differentials continue to converge

Industry prospects may be diverging again, but State prospects are converging. And they’ll narrow further as the resource States ride rising gas output while the south east feels the blowtorch to the belly as their housing downturns weigh on retailers and on home building. The population powerhouses of Victoria, the ACT and Queensland will see the fastest growth over the long haul. Meantime, recoveries are set to slowly strengthen in the Top End and the West, while Tassie and SA will continue to be held back by their ageing populations.

The ‘great’ times for the NSW economy have already faded to merely ‘good’ times, as spectacular falls in house prices increasingly eat into the willingness of families to spend and of developers to build apartments. Even so, the State still has some tiger left in its tank, getting a boost from ongoing infrastructure spending.

The low $A, simply stellar population growth and continued infrastructure spending will help Victoria’s economy to weather the storm of falling house prices. But storm it still is, with apartment building set to slow, retail in the slow lane, and job gains – the hero of the State’s economy – set to slow from its sprint.

The Queensland economy has improved off the back of more gas exports and more tourists, as well as the lift in people power it is getting thanks to crazy house prices sending refugees from Sydney and Melbourne up north. Even so, growth is taking a bit of a breather as low wage gains weigh on the spending in its shops.

South Australia’s economy keeps chugging along, supported by both public and private sector spending. But – like the east coast – SA is increasingly feeling pain in both retail and in housing construction. In addition, poor population growth will continue to be an albatross around the neck of SA’s longer term growth prospects.

Happier iron ore prices are welcome news for a West Australian economy whose recovery stalled over much of 2018 as housing slid once more. But its miners are now digging deeper, and the tempo of that is rising. Although it’s no mining boom redux, that does point to some gradually gathering momentum in the State.

Tasmania’s sprint has been great – the best that the State’s economy has managed since before the global financial crisis, with good population gains and rising house prices. Yet we don’t forecast it to last, as gains in capex by business, spending by governments and retail therapy by families are all expected to ease back.

The Ichthys LNG show is in its final stage of production. The resultant large increase in LNG exports for the Northern Territory looks great for growth on paper, but it’s less flash on the ground amid a painful and ongoing retreat in spending, jobs and people power.

There’s a Federal election on and money is being sprayed around. Not surprisingly, then, the ACT is on a hot streak amid strong growth in population, service exports, government spending and building works. With all engines firing, activity will remain strong over the short term – but beware slowing apartment construction.

Media contact

Simon Rushton
Corporate Affairs & Communications
T: +61 2 9322 5562
M: +61 450 530 748
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