Growth peaks globally, housing slides locally
Business Outlook Q4 2018
29 January 2019: Global growth is still sprinting, but it is increasingly showing signs of starting to run out of puff. The US continues to move fast, with its afterburners blasting away off the back of the huge tax cuts of late 2017. Yet that impact will fade, leaving US growth easing back amid higher interest and exchange rates. Japan will also have its own growth demons to deal with as the much-delayed hike in taxes on consumers hits home there in late 2019. And even though China has delivered a kitchen sink of stimulus amid the stresses and strains evident in an economy overly burdened by debt, that hasn’t stopped its growth continuing to slow – and that slowdown accelerated in recent months. Add in some evidence of slowing in Europe too (especially in Germany) and today’s excellent economic growth around the globe may be pegged back to rather more pedestrian rates through the course of 2019 and 2020.
Australia’s growth is solid and national income gains are strong, but the challenges are mounting. The combination of a mini-credit crunch, plus the drought and falling rates of housing construction will see growth pegged back during 2019. But not by all that much. The housing correction is occurring amid great job gains and falling unemployment, which makes it rather less dangerous than otherwise. And there’s known good news on the horizon: businesses look set to gradually expand their capacity at stronger rates, and that should be happening at about the same time as the current support to growth from growing gas exports finally starts to flag. Even better (especially for families), wage growth will continue to recover, albeit at snail’s pace. All things considered, that’s a pretty happy set of circumstances for Australian businesses and for Australian families.
Australia’s economy has been outperforming, especially so in job creation. Yet while our economy has outperformed, inflation hasn’t. That failure of inflation to dance to its usual drivers is far from being only an Australian phenomenon. It’s much the same story all around the globe. And nor do we forecast a rapid return to wage and price pressures in Australia: although wage growth is recovering, it is emulating the snail rather than the sprinter as it does so.
Wages are making arthritic gains around the globe. That will keep the uptrend in borrowing costs for governments intact, though they may not rise as fast in 2019 and 2020 as they did in 2018. And there may be even faster increases in borrowing costs for corporate borrowers and for those in emerging economies as risk spreads widen from their Sleeping Beauty phase. Here in Oz cash rates remain at 1½%, the lowest in half a century. And we don’t see them going any higher before 2020: banks have already clamped down on credit, wage and price inflation remains on a tight leash, and housing markets in Oz are too fragile to be rapped over the knuckles by rising rates. Meantime, with interest rates rising faster overseas than here, and with China’s stimulus likely to lose momentum, we see the Aussie dollar stuck in its new (lower) trading range for a while.
Trump’s trade wars remain a distraction in understanding recent Australian trade trends. Despite the drought, the current account has dropped to multi-decade lows as a wave of new resource exports benefit from a simultaneous surge in world pricing amid Chinese stimulus. That’s great, but it is probably also temporary. We see world prices for key Australian exports on the back foot over the medium term, while gradually rising interest rates will add to the cost of servicing our foreign debt. That combination will eventually see the current account climb once more.
Population and jobs are inextricably linked: you can’t mess with one without the risk you’ll muck up the other. And that’s what makes the debate around population and infrastructure, as important as it is, somewhat ineffective. Politics may demand using policy levers such as cuts to migration to fight problems such as overcrowding. But do that and you run the risk that an equally strong force – markets – will help ensure that the workers in demand are found from some other source.
There’s been a surge for surplus, but upcoming elections could see politicians make permanent promises off the back of temporary good news. Why might recent good news be a flash in the pan? Coal and iron ore prices aren’t better-than-budgeted because China is better-than-expected. Rather, they’re looking good precisely because China is weakening, leading that nation to pump stimulus into construction. That plays to the sweet spot of company profits and company tax here in Australia, but it shouldn’t lull you into a false sense of security as to where tax revenues head over time. Besides, bank profits are already weakening amid tightening lending criteria, and as rising global interest rates eat into loan margins. That combo could be kryptonite for company tax over the next few years.
It’s neck-and-neck for the fastest growing sector in Australia in the coming year
It’s neck-and-neck for the fastest growing sector in the coming year, as big new gas projects start to hit nameplate production targets in mining and energy, and as a combination of the rollout of the National Disability Insurance Scheme plus a flurry of elections sees health care prospering.
But there’s a difference. Mining is on a sprint to a long awaited finish line, whereas health care is on a marathon of great growth as demographics, dollars and new technologies turbocharge that sector. And a bunch of other service sectors are also on the surge, ranging from those surfing the corporate change agenda (such as professional services), to those taking advantage of the opportunities on offer from new technologies (such as information services). Meantime Asia’s rise is still wind beneath the wings of both education and tourism / recreation.
Yet it isn’t all sweetness and light. Farmers won’t bounce back overnight from the current drought, while manufacturers are juggling the impact of rising gas bills and relentless import competition.
And then there’s the trio of finance, property services and construction, all of whom are victims – to a greater or lesser extent – of the current mini-credit crunch and the accelerating falls in property prices in Sydney and Melbourne.
Finally, save some sympathy for the utilities. Canberra’s inability to compromise has locked us into a policy landscape that’s more third world than first world. The Feds have had to give up on three different attempts to integrate energy and climate policy in the last three years, and don’t have the stomach to try again. Instead, they’re yelling and pointing fingers. That’s dumb. Energy companies may not be perfect, but yelling at them isn’t a substitute for a coherent energy policy.
No more two-speed economy as State growth differentials finally ease
No more two-speed economy: growth gaps between the states and territories are finally easing. For a number of years the north and west of this nation surfed the resources boom, followed by a phase in which the south and east was where it was all happening as house prices partied and as their population gains lifted. But we’re now entering what looks likely to be calmer waters, with house prices relearning the laws of gravity, and with miners finally starting to spend a little more on developing new mines than they have in many a year. That said, differing approaches to migration policy look set to see Victoria move more consistently ahead of NSW in the State growth stakes.
Migration to NSW was about to fall anyway, due to house prices holding a big stop sign at Sydney’s outskirts, plus a surge of students about to finish their courses and go. NSW’s growth is still very good, but the infrastructure spend in the State is peaking, house prices are falling, and consumer caution is rising.
Victoria continues to grow rapidly off the back of low interest rates, the low $A, and the State’s simply soaring population numbers. Currency effects will ease and rates will start to hurt, but we expect Victoria to remain a top performer, largely a result of its status as a population magnet.
Queensland’s cavalry is here: gas exports are leaping, and Sydney’s stupid housing prices are underpinning a resurgence in population gains back above the national average. So State growth has recovered from tricky times amid the downturn in resource investment of just a few years ago.
South Australia continues to motor despite the closure of its once-pivotal car making industry. And there’s more where that came from: rising business confidence, an easing $A and still low interest rates look set to help to keep the South Australian economy on track for steady growth.
Western Australia’s economy continues to slowly lift, but it still has a long way to go. Rising gas production is a strong positive, but weak population and domestic demand growth are keeping a lid on current conditions, while even healthy iron ore prices have done little to get a groove going.
2018 was the first time in a decade that Tasmania’s economy saw faster growth than the national average. Yet that isn’t a surprise, with a range of growth drivers pointing to good news for some time now. In particular, population growth remains relatively healthy, underpinning future prospects.
The shift from construction to production of the huge Ichthys project has left the NT with a hangover that would do Bradley Cooper and Zach Galifianakis proud. Even so, growth will be good in the short term due to rising LNG production, though population is stagnating due to the relatively weaker domestic economy.
The ACT is continuing stellar growth amid strong population gains, infrastructure and home building, and with the risk of any Federal cutbacks fading fast. However, growth may gradually ease due to falling apartment construction (in the near term) and to rising mortgage rates (in the medium term).