Australian economy pick-up follows in global slipstream

Brendan Rynne, Partner, Chief Economist
Brendan Rynne, Partner, Chief Economist

Good news to end the year with. The global recovery, highlighted in my Q3 blog has continued to pick up steam.

In our final Quarterly Economic Outlook of the year, we revised our forecasts for the global economy to 3.5 percent growth for 2017, rising to 3.7 percent in 2018.

The US economy grew 3.3 percent in Q3, while China’s GDP grew by 6.8 percent, rebuffing some of the concerns about its economy running out of steam. India’s GDP went up by 6.3 percent – up from 5.7 percent in Q2 –  while Japan and the Euro Area also saw further improvement in economic activity over the third quarter of 2017.

Labour markets are close to full capacity in a number of key advanced economies with unemployment rates close to their natural rate (or potential). Labour force participation rates also increased slightly across several advanced economies and employment growth relatively strong.

The downside is that underemployment – as in Australia – continues to be a drag on the labour market. Wage growth continues to be relatively flat but is projected to increase gradually over 2018 as tightening of the labour market puts upward pressure of wage demands.

Forward-looking indicators indicate a continuation of relatively strong employment growth over the next few quarters.

However, the global outlook remains subject to uncertainty. Despite the U.K. and the European Union reaching an agreement in early December on Brexit separation terms, paving the way for negotiations to advance on a trade deal, many uncertainties still remain. Further, the effects of the unwinding (or quantitative tightening) of the balance sheets of the major central banks is still a big unknown.

But overall, the global economy is increasingly positive.

So what about closer to home?

The Australian economy grew by 0.6 percent (seasonally-adjusted) in the September quarter of 2017 following an upwards revised 0.9 percent growth in Q2 2017. On an annualised basis, the Australian economy grew at 2.8 percent –  increasing from 1.9 percent in Q2 2017. Growth has been relatively broad-based with 17 of the 20 industries recording positive growth.

Demand for Australian exports are expected to remain strong over the next quarter supported by healthy demand for commodities and a weaker Australian dollar

Employment figures edged upwards, but this was the lowest increase for the year and below economists’ expectations. Underemployment remains a real problem. Consumption and investment figures inched upwards.

Labour costs increased marginally with Australia’s seasonally-adjusted Wage Price Index growing by 0.5 percent q/q (2.0 percent y/y) in Q3 2017.

Overall, boosted by the global recovery, KPMG Economics’ forecast for the Australian economy in 2018 has been revised up from 2.9 percent growth in the last quarterly outlook, to 3.2 percent for FY2018.

As discussed in my last blog three months ago, the global economy is helping us. We saw it in the government’s mid-year fiscal and economic outlook (MYEFO) on Monday where higher-than-expected corporate tax revenues added a handy $9bn to the budget bottom line.

People finding jobs and coming off welfare also plays an important role in budget repair, although the wage growth (and hence bracket creep) which has sustained the budget figures for so long is now falling away, leaving a question mark about the forecast return to surplus in 2020/21.

It seems unlikely that the public finances will be strong enough to allow the government to undertake both corporate and individual tax cuts, and as my colleague Grant Wardell-Johnson argued recently,   KPMG would urge a focus on employment–creating business tax cuts – especially in light of the dramatic Trump tax cuts in the US – and targeted action aimed at the tax and transfer system which prevents so many women returning to work.

Overall, the economic position is one of guarded optimism heading into 2018. May you all – and Australia – have a prosperous New Year.

Read the full report.

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