Is the gloomy forecast for 2019 justified?



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Has that economic twig snapped again and is the gloom that we’re seeing at the moment actually justified? Commonwealth Bank of Australia Chief Economist and Managing Director, Economics, Michael Blythe asked at the launch of the Economic and Political Overview 2019 in Brisbane.

“One of Paul Keating’s advisors accounts in his memoirs from back in the early 1990s how there was this point in the economic cycle where it was like a twig snapping and that was the economy finally giving up,” he said.

“This occurred just as the Reserve Bank had pushed its cash rate up over 17 per cent and it was just before the recession that we had to have, probably not many people remember these days.

“The shift from reasonably positive views about the outlook for the Australian economy to pretty negative views has a lot of similarities to what we’re seeing today. 

“Certainly a few months ago it all looked pretty good in terms of the outlook for 2019.”

Mr Blythe attributes the increase in pessimism to both downside risks to the global economic story and the domestic economic story.

“The problem is which one do you want to choose to focus on?” he said.

“We could choose from trade wars, the mess that is Brexit, geopolitical uncertainties, or more broadly – volatile financial markets, the list goes on. 

“But there are also downside risks to the domestic story as well. 

“They’re largely centred on the consumer and the reflection of that combination of very high levels of household debt, weak wages growth and of course, more recently, falling house prices.” Mr Blythe says the risks are real but there are other things happening in the economy that mean Australia is likely to still see a reasonable set of outcomes overall for 2019. 

“What we’re seeing here is the return of the two-handed central banker who is pretty happy to say at the moment ‘perhaps interest rates will go up or maybe in fact they’ll go down’ and that probably covers a wide range of the possible outcomes that we’re thinking about this year,” he said.

“What would help? A pickup of wages would clearly be a good thing.

“As would some increase in the tax cuts that are already sitting there in the legislation at the moment and that look like quite a likely outcome when we get to the Budget later this year. 

“So, the gloom is indeed overdone.” 
 


 
Emmy award winning journalist and author, Sara James predicted 2019 will see a continuance of ‘politics unusual’ for The United States and its President Donald Trump.

“From the beginning this President has conducted matters differently,” she said.

“A lot of what I wrote about in the CEDA report is this important question of – what is truth?

“One of the mind-blowing aspects of this presidency is that the guy who gave us the term ‘fake news’ has been such a steady disseminator of things that aren’t true. 

“And there’s an old-fashioned word for things that aren’t true, and it’s lie. 

“And this president has lied a lot.”  Ms James said she doesn’t think President Trump will get fired. 

“I think the question is going to be whether or not he will be re-elected,” she said. 

“I think the Mueller investigation is going to continue, we’re going to get results, but I think the real question is what’s going to happen with the race for 2020. 

“I think that’s going to be a very exciting humdinger of a race and I do not think it’s done and dusted on either side. 

“There’s rusted on rock solid Trump support, it’s not going anywhere. 

“But every democrat I spoke to said ‘we do not care who wins, we’ll vote for them’ – we’ll see if that’s true.”

United States Studies Centre Chief Executive Officer, Professor Simon Jackman said that despite President Trump’s disregard for a conventional presidential magnanimity, the US economy is doing pretty well.

“Under Trump's watch the US economy has grown above its long-term three per cent growth rate,” he said. 

“He is the beneficiary of a lot of hard yards done by the US economy under the Obama years bringing unemployment down from a 10 per cent high immediately post GFC. 

“The Trump tax cuts do get some of the credit for this jolt to the US economy that is not just in the equities markets but as apparent in real growth and capital expenditure numbers all over the US economy.

“The tax cuts were throwing a lot of fuel on the fire in the US where there'd been a long period of growth following the GFC and a lot of economists wondering is that really sustainable. 

“Right now, the answer seems to be – well for the time being – yes.  

“A lot of uncertainty, but Trump is owed some credit there. 

“Some of it's by accident and frankly some incompetence – that Congress sensed a partner willing to get a deal done and Congress piled on a lot of spending.” Mr Jackman said at a government-to-government level at the moment between Australia and the US there's one word that animates the conversation – China.

“It's important for Australian audiences to understand the following, the change of tone in Washington with respect to China is not a Trump-specific phenomenon, the mode of execution is,” he said. 

“America first means we don't have to work through international institutions and the allies will learn about it in their own good time and we're going ahead and looking after our interests first.

“That mode of execution, that's all very Trump specific but the strategic mindset that underlies it is not Trump specific. 

“It didn't matter who won the last presidential election, President Clinton would have a very tough line on China.

“Members of our diplomatic team in Washington say China hasn't got a friend left in town. 

“You want to find a friendly voice for China, try going to Wall Street but there isn't one left in DC.

“We are back to an era of great power rivalry and strategy does not come in things painted battleship grey.

“Strategy will arrive through a fiber optic cable and that mindset has very much taken hold in Washington and to some extent for Australians.” 
 

The University of Queensland AO Chancellor, Peter Varghese said the China and US relationship is at the heart of the current geopolitical churn.

“China has already eclipsed the US as the world's largest economy, if you measure it by purchasing power parity and you'll get a lot of debate as to whether that is the suitable measure for comparing economies,” he said. 

“But it probably isn't too far away from also being the world's largest power measured in market exchange rates.

“Now the GDP per capita of China will still be way below that of the US and that will have an impact on China's priorities, and it'll have an impact on the way in which domestic and international challenges are put together in their system.” Mr Varghese said we're now entering a potentially dangerous period in US-China relations. 

“On one side the voices of containment are getting louder, the case for engagement is losing ground and some speak openly of a new Cold War,” he said.

“China for its part seems to be moving away from economic reform and from giving the market a larger role in the allocation of resources and this is something which I don't think receives enough attention.

“Whether or not the US and China reach a trade deal by one March is a third order issue compared with the decision of Xi Jinping to turn his back on structural economic reform in China.”

Mr Varghese said there’s nothing new about the US being determined to hang on to its strategic primacy.

“I think that's intrinsic to the American view of itself and America first is just one perhaps exaggerated example of the very anchored belief in the US that they are and need to remain the world's greatest power,” he said. 

“But what is new is the suggestion that this can be achieved by blocking or thwarting China.

“Now I don't think there's any sensible alternative to engaging China because containing China in the way that we contained the Soviet Union during the Cold War is a policy dead end. 

“China is just too enmeshed in the international system and too important to the economy of the region to be contained in a classic Soviet sense.

“The US should play to its very considerable strengths in economic depth and flexibility, technology, research, alliances and values to buttress its standing.

“A strategy anchored in thwarting China is a more dangerous course.

“In the end China's rise needs to be managed and not frustrated, it needs to be balanced and not contained, and constructing that balance and anchoring it in a new strategic equilibrium in the Indo-Pacific is actually the big challenge and the big project for our region over the next 15, 20, 30 years.

“We would not be in the 27th year of uninterrupted economic growth if it hadn't been for the China story and it seems to me that those four decades are now beginning to look like our salad days in terms of the relationship with China, and what lies ahead looks complicated at best for Australia and gloomy at worst.”

Journalist and Griffith Business School Professor of Politics and Policy, Peter van Onselen spoke about domestic politics and his predictions for 2019. 

“When we’re talking about the outlook for 2019, how Bill Shorten wins, assuming that he does, is probably the most important element in looking at where the new Labor Government goes next,” he said. 

“Because if he wins like Kevin Rudd, he will face all manner of problems and the instability, I would argue, will continue. 

“If however he manages to win bigger, like Bob Hawke did, I’m certainly not suggesting that Bill Shorten is Bob Hawke, but if he does win like Bob Hawke, then he has a greater capacity to fulfil not only his agenda but to have a greater level of stability within his team, which then if you like also has a flow on effect to how unstable the Liberals might be as they start to pick over the entrails of what went wrong when they’re on the opposition benches. 

“Because Liberals fight at the best of times and these are the worst of times for them in terms of where they sit with those ideological disagreements.”

Professor van Onselen said the challenge for the Liberal Party in a seat by seat election contest is not only taking on Labor in key marginal and some safe seats but also dealing with the fire internally from Independents.
 
“Tony Abbott for example is going to have to spend much of the campaign in Waringa fighting to save his seat, that’s not something that the Liberal’s mind by the way – that he’ll be isolated to his own electorate,” he said.

“But it is a problem for them when they have these sorts of contests, like trying to regain Wentworth against Kerryn Phelps, there’s the ideological disagreements with where they position themselves as a party but then there’s also just the raw reality that they have to spend money on those seats, that they have to put human capital into it from a campaigning perspective. 

“Rather than these safe seats doing what they normally do, and helping fund the fight in marginal electorates, they’re fighting wars on two fronts politically speaking and that is a real issue for them.”

Professor van Onselen said there is enormous fracturing around the country and a move in attitude that the paralysis of the government and the dysfunction from late last year is reason not to reward them with re-election. 

“When you couple that with their minority status, even though the opposition is led by Bill Shorten who is one of the least popular opposition leaders in the history of this country,” he said.

“He looks likely to go on and become Prime Minister in this country. 

“What I like about this election is we have a genuine contest, we don't have Tweedledum versus Tweedledee at this election, they're very different policy scripts that are being run. 

“The Labor Party have provided a platform as an alternative and the government have clearly earmarked their disagreement with it, so we're left in this scenario where there is a genuine choice for voters. 

“All that we have left to see between now and the May election is how that forms.”

Economic and Political Overview 2019

To download a copy of the Economic and Political Overview 2019 report click here.
 

Event presentations

Michael Blythe, Commonwealth Bank of Australia MP3 | PDF

Sara James, journalist and author MP3 | PDF

Peter van Onselen, Griffith Business School MP3

Simon Jackman, United States Studies Centre MP3

Peter Varghese AO, The University of Queensland MP3

Moderated discussion MP3

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