When data for the September quarter GDP was released at the beginning of December, economists debated whether Australia’s economy was entering a “gentle turning point” that signalled better times ahead.
Before declaring the beginning of the end of a weak patch, it is important to question what, if anything, in the current economic climate has substantially changed. Where are the signs that Australia’s economy has found the spark that will allow it to change gears in 2020?
Global headwinds in advanced economies continue
Greater optimism in the global economy could bolster confidence, but better news in this area is not forthcoming. Global growth fell to 2.9 per cent in 2019, its worst performance since the global financial crisis.
The OECD is forecasting that the next two years will only be fractionally better at three per cent per annum. Amidst low inflation, central banks, including the RBA, have lowered official interest rates, increasing their reliance on so-called “unconventional monetary policies” if conditions deteriorate further. Across almost all advanced economies, interest rates are at their lowest levels in 150 years.
Uncertainty around US-China relations, the imminent impact of Brexit and weak demand have hit growth in global trade and business investment. The negative trade feedback loop is powerful – businesses generally invest to produce, and they produce to trade. The impacts of protectionism and policy uncertainty have now well and truly caught up with politicians.
Resilient consumer spending and a buoyant labour market are holding up growth in the US for now – household spending has grown at over three per cent in the last year and the US labour market added 266,000 jobs in November, with unemployment at 3.5 per cent.
In contrast to the US, global conditions are biting in Euro area economies like Germany where a decline in manufacturing is set to drag growth well below one per cent over coming years. In the UK, the full economic impacts of Brexit will become apparent over time. Some estimates suggest the economy could be 18 per cent smaller in 15 years than it would have been if the UK stayed in the EU.
And some headwinds are more than temporary
Against these headwinds, advanced economies face long-term structural challenges. RBA researchers Ivailo Arsov and Benjamin Watson observe that the potential rate of growth in advanced economies has been in decline since at least the mid-1980s. Like so many other global economists, they put this down to slower population growth, ageing, investment and weak productivity.
But there’s still some good news
The good news is that advanced economies are still growing, albeit at a slower pace than we’ve been accustomed to in previous decades.
The even better news for Australia is that our trading partners expose us to economies growing at a faster rate. Despite moderating in the last few years, China’s economy has still been growing at over six per cent a year as the government aims to reign in debt accumulation from stimulus measures and transition to a more sustainable growth phase.
China’s economy is on track to double in the decade to 2020. The scale and growth of China’s economy remains unfathomable to many – consider the fact that it used more concrete between 2011 and 2013 than the US during the entire 20th
Century. China’s next stage of economic development and the growth of the Chinese middle class continues to present significant opportunities for Australia.
Australian consumers remain cautious
Here at home, consumer spending continues to be a source of consternation. Household final consumption expenditure makes up around 56 per cent of our economy and has a considerable bearing on growth. In the September quarter of 2019, household spending grew a mere 0.1 per cent, with income increases from tax refunds feeding household savings and debt repayment rather than stimulating spending.
Measures of consumer confidence have shown steady declines throughout the year, and despite slight upticks recently, remain below historical averages. The reasons behind the decline in confidence, including slow wage growth coupled with high household debt, are couched within the wider context of global economic uncertainty. These factors show no signs of changing any time soon.
Filling the economic void
So what’s been filling the economic void of late?
For the past two years, final demand from public sector stimulus has plugged the gap following the transition of the mining industry from booming investment to steady production phase. Heavy investment in infrastructure spending on roads, railways and ports, particularly in eastern state capitals, has fuelled growth in public capital formation and bolstered demand for heavy and civil engineering services.
In addition, jobs in largely publicly funded sectors like healthcare and social assistance have boomed – 301,000 of the 312,000 jobs created over the last 12 months were in the public sector.
The one channel through which monetary policy still seems to be working its magic is a lower Aussie dollar, further buoying strong export markets for Australia like international education. International student registrations have increased at an average annual rate of 11 per cent over the past three years.
Our resources exports have also continued to add to growth, fuelled by higher than expected prices for major commodities like iron ore which have been impacted by global supply disruptions. Rural exports slumped through 2019 as the drought took its toll.
Business investment – waiting for a spark
Business investment is still largely missing in action and without stronger signs of life, it is difficult to see what will fuel the even greater strength needed in the labour market so that wages grow faster. An unemployment rate of 5.3 per cent is simply not good enough to get stronger wage growth, especially when underemployment is at levels not seen in the last 25 years.
So, at this stage we see Australia’s economy continuing to muddle through in 2020. It will be challenging for Australia to do much better until we see a spark from consumers and business.
Policy can still play its part
These challenging economic conditions only underline the importance of solid long-term policy frameworks that give business and the community confidence to employ, invest and innovate for our future. This will continue to be the focus of all the work we do at CEDA in 2020.
A great place to start 2020 will be our Economic and Political Overview (EPO) series
across every state and territory of Australia in February. We’ll be there to talk through these issues with some of Australia’s foremost economists, policy and political thinkers. We hope to see you there too.