For all the horror headlines around tariff wars, the global economy is going well and it remains a positive for Australian businesses and families. That good news may be running out of puff as 2019 turns into 2020. China, Europe and Japan each saw slowing growth in 2018, and global growth in 2019 will depend on developments in the US. Although the US should have a good 2019, the stimulus it received off the back of the huge tax cut in late 2017 will fade, with the pace of growth in its economy expected to be dragged down amid higher interest and exchange rates. Less-expansive monetary policy will also weigh on an already slowing Europe. Closer to home, Japan will have to face its own growth demons as the much delayed tax hike on consumers hits home in late 2019. The way in which China has delivered a kitchen sink of stimulus amid the stresses and strains evident in an economy overly burdened by debt hasn’t stopped the growth in its economy continuing to slow.
In Australia, that expected gradual slowdown in global growth will coincide with an economy dealing with a mini credit crunch, drought and falling housing construction. This will see growth slow a little. The housing correction is occurring amid great job gains and falling unemployment, which makes it less dangerous than otherwise.
Businesses look set to gradually expand their capacity at stronger rates, which should be happening at the same time as the current support to growth from growing gas exports starts to flag. Wage growth will continue to recover, albeit slowly.
Interest rates and the RBA
One thing you’re unlikely to have to worry much about in 2019 is what the Reserve Bank may do. Despite relatively good news in the global and Australian economies, wage growth remains pretty sleepy. Because that is the key driver of inflation, the latter is also continuing to take a nap. That’s not to say wages aren’t gathering pace, especially in economies (such as the US) with lower unemployment rates than ours. That will keep the uptrend in borrowing costs for governments intact, with interest rates in the US likely to climb during 2019, though they may not rise as fast in 2019–2020 as they did in 2018. The increases in borrowing costs for corporate borrowers and those in emerging economies may be even larger than the increase in borrowing costs for governments as risk spreads begin to widen from their hibernation phase.
Australia’s official cash rates remain at 1.5 per cent, effectively the lowest in 50 years. 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 are too fragile to be rapped over the knuckles by rising rates. Meantime, with interest rates rising faster oversea, and the Chinese stimulus likely to lose momentum over time, we see some gentle downside ahead for the Australian dollar.
Jobs and trade
Trump’s trade wars remain a distraction in understanding recent trade trends here in Australia. Despite the drought, this nation’s current account deficit has dropped to multi-decade lows as a wave of new resource exports benefits from a simultaneous surge in world pricing amid Chinese stimulus. World prices for key Australian exports will be 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 from mid-2019 onwards.
Employment growth has been stellar as much of the strength in Australia’s economy has shown up as gains in jobs rather than wage growth — and the news on jobs is likely to remain happy in 2019.
Australia’s federal budget will be returning to surplus during 2019 after a decade of deficits, bringing a risk that the upcoming election will prompt politicians to make permanent promises off the back of temporary good news. Why temporary? Coal and iron ore prices are looking good precisely as China is weakening, leading that nation to pump stimulus into construction. That plays to the sweet spot of company profits and company tax, but brings a false sense of security as to where tax revenues head over time. Bank profits are already weakening amid a tightening of lending criteria and as rising global interest rates eat into loan margins.
How the sectors will perform
Mining output is soaring as a surge in LNG export volumes occurs, but health care is likely to be the fastest-growing sector in Australia, riding an ageing population, the rollout of the NDIS, and the last hurrah of the stamp duty cycle, set to underpin electoral promises to boost NSW health funding.
Information services will sell lots and business services will sell the implementation of those new technologies. The finance sector is taking big hits amid the rising cost of global funding, overstretched house prices and fired-up regulators in the wake of the banking Royal Commission. Its growth is projected to slow. Manufacturers look set to struggle — more from rising energy costs than currency-induced chaos. If the drought eases, farmers can expect to bounce back in the second half of 2019, although that may be moderated by the slow speed of the rebuild in livestock herd numbers.
Despite current investment in renewables, utilities will be slow-growers, reflecting the impact of rising energy costs on big industrial customers and Canberra’s inability to craft acceptable policy compromises, meaning future investments in electricity generation may be minimal.
Population is key to state growth
The fastest-growing states and territories are those with the fastest-growing populations — Victoria and the ACT. The slowest-growing are forecast to be the NT and Tasmania. Lifting gas exports will increase growth in NT and Queensland by next financial year. Exports may help WA surpass the growth in SA. NSW remains a top-notch performer despite slipping house prices and drought-stricken farmers. Infrastructure and consumer spending underpin its current strength, but sky-high mortgages and weakening population gains pose future problems.