Business Outlook – Oz muddles through global uncertainty
14 October 2019: Global growth is still slowing. Even though the trade wars are worsening, the largest single driver of the slowdown is no longer push and shove over trade. Rather, families and businesses have lost confidence in the ability of political leaders to govern wisely. Amid that rising uncertainty, business in particular has wound back the money they spend today to help them sell more in the future. The resultant pullback in investment plans is a global phenomenon. And it is now the largest driver of the downturn.
Worse still, risks are still rising. Brexit, Kashmir, Hong Kong, Iran and the Saudis … the rollcall of possible flashpoints is growing ever longer. Yet, as we often stress, headlines and economies are two different things. Although more could go wrong than already has – the risks of that are rising – to date the global economy has been dominated more by the risk of things going wrong than actual poor outcomes. So you shouldn’t overstate the weakness in the current path of global growth. It’s below trend, but not markedly. The world may be run by dictators and dumbos, but to date the damage that has caused has been well contained.
Australia has been a big winner from the world slowdown. Yep, winner. China is fighting its slowdown with stimulus, which has led to a pay rise for Oz via higher iron ore and coal prices. Rather, the pain in our economy has been homegrown, coming from the double whammy of a deflating housing boom (leaving consumers cautious) and a nasty drought (flattening farmers). The bad news is that, although global events have so far helped our economy rather than hurt it, that could change fast. The geopolitical landscape is littered with risks to an extent not seen in decades.
But neither the drought nor the housing downturn are here to stay, and there’s already stimulus via cuts to taxes and to interest rates, plus a lower $A. And housing prices are now rising, which may limit the damage housing does to the economy from here on. So, absent a spanner in the works from a global threat, Australia should keep muddling through the aftermath of a housing bubble and a drought. Growth won’t be flash, but it should slowly lift. Yet that recovery looks unlikely to develop sufficient momentum to see wages accelerate or to see unemployment fall much over the coming year. That will disappoint many, including the Reserve Bank.
Inflation has been on a falling trend around the globe for many years. And it’s set to stay weak in Australia in the near term, with a slowdown in the local economy stripping pricing power from businesses, with the growth in labour costs set to calm back down from its recent pick up, with the one-off boost to import prices from falls in the $A also set to fade, and with State and Federal governments focussed on winding back cost of living pressures for grumpy voters. Of that list, wages are the key to many hearts and minds. But the bad news is that the grinding recovery in wage momentum in recent years may stall for the coming year.
Central banks are cutting interest rates and markets are slicing longer term borrowing costs. But rates are falling for two reasons, not one. The reason that everyone understands is that the world’s economies have slowed. The second reason is the one most people miss (or misunderstand): rates are also falling because these days the world’s growth shows up more in jobs than in wages, so inflation is harder to get moving than it used to be. That’s why the Reserve Bank is doubling down on the accelerator – cutting for cyclical reasons (a slower economy) and structural reasons (inflation is harder to get moving). That’s also part of the reason why, despite strong commodity prices and a global currency war, the $A has fallen 10% since late 2017.
The world has been giving Australia a pay rise amid a global slowdown. That’s never happened before. It means Australia has been the world’s biggest winner from the trade wars and the slowdown in China. That marvellous combination has given us the first current account surplus in more than four decades. But wait, there’s more. Borrowing costs have collapsed. That’s a big benefit for a nation with a trillion dollars in global debt, with the savings from that building substantially over time via a lower net income deficit.
Two beautiful things are happening – more Australians are showing their willingness to work (more women, and lots more older workers), and more jobs are being created. But the great news in the supply of willing workers has been outpacing the very good news in the demand for those workers, leaving unemployment edging up – and leaving the Reserve Bank having kittens. We’re less worried about that. After all, what is bad news for inflation today is also very much needed news for a nation that is juggling an ageing population.
Australia’s fiscal finances have gotten hugely better, as overlapping waves (rising house prices, rising commodity prices) boosted State and Federal taxes, while delays in the NDIS rollout have been slowing spending. Yet there is a fragility about revenues. They rely on two trends whose sustainability is suspect – Chinese stimulus and housing price rises in Australia. That’s why there’s a risk that this is just five minutes of surplus sunshine in the nation’s fiscal finances, as the States in particular move back into deficit.
The banks achieve a Houdini-like escape
Australia’s industrial landscape continues to change. Over the past decade, mining output has surged off the back of gas projects that got the tick many years ago, but otherwise it’s been a story of success in services (health care, the professions, property, IT and finance) versus sustained stagnation in manufacturing, farming and the utilities. Looking ahead, mining may lose its growth tiara to health. Mining’s sprint off the back of rising gas output will finally start to drop back towards the pack, whereas the drivers of growth in health continue to go from strength to strength. At the same time both IT and the professions may keep in touch with health care near the top of the growth leaderboard in the next few years.
The banks have achieved a Houdini-like escape from a housing bubble and questionable lending practices. That combination looked as if it would leave credit growth in the naughty corner for an extended period. But the short term costs to economic growth of reforming banking spooked policymakers, who’ve opted to sweep some things under the carpet and to throw stimulus at housing prices. That will see the banking sector rev up its growth once more. But it also kicks a can some distance down the road. And a lift in credit growth may not turbocharge profits, with the shift to very low interest rates squeezing margins rather more effectively than competitive forces have done.
Meantime, farmers, retailers, builders and real estate agents will all have to wait another year before things look up. The drought is lingering longer than an uncle after Christmas lunch while, despite rebounding house prices, construction will get worse before it gets better and retail’s recovery may be mild rather than wild. Similarly, it will take time for rising housing prices to be reflected in rising housing sales turnover.
Finally, public sector growth has helped steady the ship of the wider Australian economy through the current slowdown, and the sector looks set to keep chugging away with solid growth in the next few years.
A housing let off for the east coast States
Most of the stimulus flowing through the veins of the Australian economy is housing-focussed. That’s why housing prices in Sydney and Melbourne have bounced back to be rising at rates higher than a 1970s Rolling Stones concert. In turn, that is increasingly – if only gradually – putting a floor under Australian economic activity, particularly in NSW and Victoria. That points to a modest strengthening of the State economies in the south-east corner of the nation relative to the resource-dominated regions to the north and the west. Then again, reflating the housing boom means taking a hair of the dog that just bit us. It’s a temporary fix for a nation that is in need of structural reforms. ’Twas ever thus.
The rebound in Sydney’s housing prices (currently rising by $3,000 a week) is welcome, but it’s also bad news. It will help NSW by boosting retail (soon) and housing construction (in a little while). But down the track the return towards diabolical rates of housing affordability will bite into NSW’s economic and population growth.
Victoria has slowed, but it has stronger defences than any other State, including nation-leading population gains, surging public infrastructure, and rebounding property prices (even if the latter are a double-edged sword). That has put a floor under State growth, which should lift from here (and stay ahead of Australia’s).
A boost to coal and gas export earnings will help to offset some of Queensland’s pain from natural disasters and from consumer caution. But only in the short term. Looking ahead, good population growth will help to underpin Queensland’s growth, but don’t expect this State to grow too much further as a share of Australia).
South Australia is seeing its best gains in people power – its workforce – since the mid-1980s. But that has run ahead of job gains, which are feeling the pain of a construction slowdown and global uncertainty. Falls in interest and exchange rates help, but there’s a risk younger workers head to greener pastures in other States.
Western Australia is a huge beneficiary of China’s stimulus, but the State’s housing prices continue to fall. That gets in the way of the virtuous circle which could be unlocked by higher commodity prices: investment growth, higher wages, happier consumers and population gains. Recovery is continuing, but it’s still a slog.
Tasmania’s long run of good growth is easing, but growth remains good. An unsung strength is that Melbourne and Sydney’s rebounding housing prices will keep people moving south. But longer term resilience will require Tasmania to see the same lift in numbers of older workers that the nation has been seeing.
The Northern Territory’s economy is still lost in the backwash left as its biggest ever construction project finished up being built. The good news is that gas exports are now lifting as a result, but the bad news is that increase in exports may not generate much of an onshore feelgood factor in Darwin or Alice Springs.
Canberra’s economy remains in pretty good nick, but the ACT is bedevilled by the quirk of super that leaves many public servants retiring before they turn 55. So it hasn’t matched the national lift in workforce participation. That may slowly eat into what has been a long-running pillar of Canberra’s relative prosperity.