Economic outlook: Australia steers a middle course through Brexit fog of global uncertainty

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

The fall-out from the historic Brexit vote may have given the world economy the ‘interesting times’ that the famous Chinese curse warns of.

Prior to the Brexit referendum world economic growth was subdued, and now it looks like 2016 will record the lowest level of growth since the GFC.
The spectre of the UK leaving the European Union (EU) has increased global uncertainty and impeded the fledgling signs of recovery in the world economy.

We were starting to see signs of fragile improvement in emerging markets and developing economies; and Brazil and Russia were beginning to return to positive growth sooner than previously expected. But now the IMF has downgraded its global growth forecasts in the wake of Brexit uncertainty, dropping 0.1 percent in both 2016 and 2017 to 3.1 percent and 3.4 percent respectively. KPMG, in our latest Quarterly Economic Outlook has marginally more pessimistic predictions – we see those figures as being 3.0 percent and 3.3 percent.

Domestically, we believe the Australian economy will grow at 2.9 percent in 2016, which suggests relatively soft growth for the June 2016 quarter.

Despite the end of the resources boom two years ago, it is the export sector which is still supporting our growth, with mining production generating economic benefits from a volume (and slight price) perspective, and services also contributing positively to our trade balance.

Other key points from the report: :

  • Declining business investment continues to be a drag on economic growth, and is anticipated to do so well into FY18.
  • State Government debt, including unfunded superannuation liabilities, is growing faster than either Commonwealth or Local Government debt. This is a concern.
  • While the economy is improving, the report observes that employment growth is not occurring at rates strong enough to make a major impact on Australia’s unemployment levels. KPMG anticipates unemployment to remain sticky between mid-5 percent and 6 percent for the medium term. The labour market has also been much weaker in the first half of 2016, with only 43,000 new jobs generated in the six months to June, and the number of full time employed people declined by nearly 19,000.
  • In addition to a ‘sticky’ unemployment rate, there also remains a historically large proportion of employed people who are working less than they would like. The under-utilisation rate of employed people is at its highest level since the ABS survey began in 1978. However, there is a marked skew in these results, with people aged 16-24 years recording under-utilisation between 2 to 3 times higher than older workers.

KPMG’s Quarterly Economic Outlook always incorporates a ‘what-if scenario’ to assess its impact on the world, and particularly the Australian economy. In the August edition we analysed what could happen if global investors lose confidence in the European economy and in the effectiveness of monetary policy within the EU. In essence we broadly followed the methodology proposed by the European Banking Authority to stress test banks within the EU.

The outcome was a 1.5 percent hit to world trade and a severe impact on the Eurozone – EU GDP would contract by -0.4 percent and -0.6 percent in absolute terms immediately after the shock occurs. Australia would not escape from the impact of Europe melting down, although our GDP growth would remain positive over the forecast period, it would be lower by -0.1 percent, -0.6 percent and -0.4 percent in each of FY17, FY18 and FY19.

While this is only a ‘what if’ scenario, it is not beyond the bounds of possibility, and the outcomes of this analysis contain an important lesson for our own Central Bank. Namely, that Australia must maintain some headroom in its official cash rate if we get hit with a global / European downturn. By not having our cash rate at or near the 0 percent we have the capacity to drop rates in order to minimise any shock to our domestic economy.

Finally, the Australian economy continues to grow at rates better than most of the developed economies. But by historical standards it is subdued, and KPMG would argue needs targeted investment in infrastructure projects funded through virtually zero-real cost government bonds and reducing existing inefficient and ineffective government expenditure.

Brendan Rynne

Read the full report here.

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