feature - deloitte us · 2020-05-17 · 4 david rumbens is the lead partner of the macroeconomic...
TRANSCRIPT
FEATURE
AustraliaEconomic growth despite political machinations
David Rumbens and Ben Guttmann
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A positive outlook
Unlike its politics, Australia’s economy remains on a steady trajectory. Six changes of prime minister in as many years (including the most recent replace-ment of Malcolm Turnbull with Scott Morrison) would suggest something is amiss Down Under. But unlike in other countries with a high degree of turnover at the top, Australia’s economy continues to perform. Annualised economic growth has been over 3 percent across the first half of 2018.1 The current combination of a supportive global environ-ment and growing domestic demand should see it stay there for the remainder of 2018 and 2019.
The most obvious dividend from the current economic strength has been strong employment outcomes, with jobs growth in excess of Australia’s very high rate of working age population growth (by developed country standards). This has and will continue to reduce the amount of slack in the labour market, with Australia’s unemployment rate down around a percentage point over the last four years to 5.3 percent. We expect this to fall further over time, creating the conditions for a very gradual rise in wage growth. However, that eventual pick-up in wage gains will likely generate additional inflation, leading to an increase in the central bank’s bench-mark interest rate, which has been at the historic low rate of 1.5 percent for over two years. The return to more normal interest rate settings will place pres-sure on Australia’s heavily indebted households, and will also put the brakes on broader economic growth, testing its ability to remain above an annual rate of 3 percent over the medium term.
Recent economic growth has been driven by household consumption and government spending.
The elevated rate of population growth has prompted governments to up their spending on transport and other infrastructure, with the two largest states, New South Wales and Victoria, in particular lifting their rate of public investment, spending the dividends of stronger property-related revenues and recent asset sales. Governments have also been spending big on the rollout of a new social welfare program to assist the disabled. At the moment, this lift in government spending is adding to demand, encouraging more private sector activity.
Measures of business conditions remain at el-evated levels on the back of solid economic growth and increased profitability even as business confi-dence has wavered in recent times. The dichotomy likely reflects greater uncertainty on the global outlook due to the escalating trade dispute between the United States and China, and emerging market jitters as US interest rates rise. That said, expecta-tions for business capital expenditure are on the rise based on improved profitability—a good sign as business investment has largely been a drag on growth in recent years. The revival of business investment is an important ingredient in keeping Australia’s economy growing over the medium term as household consumption growth may fade (con-strained by high debt levels).
More downside than upside
While our most likely view on how the Australian economy evolves from here is positive, the risks to that outlook are weighted on the downside.2 House-holds have been a key driver of the economy in recent times through increased spending, including
The Australian economy remains a standout among developed economies, supported by favourable global conditions and strong domestic demand from population growth. However, global uncertainty and high household debt may weaken growth prospects.
Australia: Economic growth despite political machinations
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on housing. But record-low wage growth has meant that growth has been based on a large run-up in household debt, rather than income growth. In-terest rates on that debt (by far the largest share of which is devoted to housing) have already started to increase, even without the central bank moving its benchmark interest rate. That combination of rising borrowing costs and anaemic wage growth could crunch the capacity of households to further lift their rate of spending, acting as a drag on 60 percent of Australia’s economy.
Movements in global markets could also affect China, Australia’s most important trading partner. The increase in interest rates in the United States has seen money flood back into the United States from emerging markets, causing troubles from Ar-gentina to Turkey. To date, the effect on China has been muted, with some impact on financial markets and consumer/business confidence. The key risk to Australia will be if the contagion spreads further to China, coupling with other emerging weaknesses in that economy, including its large stock of debt and the ongoing trade dispute with the United States. Were it to occur, any further slowdown in Chinese growth—especially if it was centred in China’s heavy industry and construction sectors—would limit Australia’s growth prospects.
Elections approach in a time of relative plenty
To date, the biggest beneficiary of the improved economy has been the federal budget position, which, while still in deficit, has recorded its best result since 2007–08. This is welcome news for
both the government and opposition, with Australia set to head to the polls by May 2019.
The improved federal budget position has allowed both parties to sharpen their pitch to voters, by focusing their promises directly on households. This includes the current conservative coalition government that has shelved its plan to provide tax cuts to big businesses following its inability to pass legislation for such a cut in the current parlia-ment. Both sides of politics have, to varying degrees, proposed personal income tax cuts and new spending measures focused on health, aged care, and education.
These policies may be particularly important in keeping household spending on track if more robust wage growth does not materialise. However, the ca-pacity for both parties to pay for these commitments depends on tax revenue coming in, which is particu-larly vulnerable to any slowdown in Chinese growth both through direct trade and investment, and via China’s role in supporting overall commodity prices. Any slowdown in China along the lines of that described above would limit the capacity of any government to pay for its tax cuts and spending promises while still returning the budget to surplus.
Australia’s two largest states of New South Wales and Victoria also head to the polls in March 2019 and November 2018, respectively. Spending by these state governments has been supported of late by surging property revenues, but with the Sydney and Melbourne housing markets showing price falls over the past year, future spending by these state governments may be more constrained. A possible moderation in spending by Australia’s largest state governments is another risk factor that may con-strain Australia’s overall rate of economic growth.
1. Unless otherwise stated, all historical data has been sourced from the Australian Bureau of Statistics.
2. For more details, read Deloitte’s quarterly Business outlook for the Australian economy.
Endnotes
Australia: Economic growth despite political machinations
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DAVID RUMBENS is the lead partner of the Macroeconomic Policy and Forecasting team at Deloitte Access Economics in Australia. He has extensive experience in applied economic and quantitative anal-ysis of the Australian economy, along with considerable experience in labour market analysis. He is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
BEN GUTTMANN is a manager in the Macroeconomic Policy and Modelling practice within Deloitte Access Economics. Guttmann is an experienced economist with a particular focus on Australia’s eco-nomic outlook, tax policy, and scenario modelling and analysis. He is a contributor to Deloitte’s Business Outlook publication, providing commentary and forecasts on the outlook for Australia’s states and territories.
About the authors
Contacts
David RumbensPartner, Financial AdvisoryAustralia+61 3 9671 [email protected]
Ben GuttmannManager, Deloitte Access Economics Pty Ltd.Australia+61 03 9671 [email protected]
Global industry leaders
ConsumerVicky EngDeloitte Services LPUnited States+1 203 905 [email protected]
Energy, Resources & IndustrialsRajeev ChopraDeloitte Touche Tohmatsu LimitedUnited Kingdom+44 7775 [email protected]
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Life Sciences & Health CareGreg RehDeloitte Consulting LLPUnited States+1 215 680 [email protected]
Australia: Economic growth despite political machinations
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Government & Public ServicesMike TurleyDeloitte Touche Tohmatsu LimitedUnited Kingdom+44 7711 [email protected]
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Australia: Economic growth despite political machinations
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