Global growth shines through the trade war clouds

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

The threat of a trade war is still very real. But life goes on, and the economy is still pushing ahead.

Global growth in 2018 has been strong across most sectors, with a pick-up in private business investment and (so far) global trade, and is expected to remain positive for the rest of the year. In the advanced economies, employment remains strong and wage growth has picked up slightly, while the outlook for growth is also positive in the emerging and developing economies in Asia.

Further afield, growth in emerging market economies have returned to rates closer to historical averages although countries like Argentina and Turkey have come under financial stress over the recent quarter. Growth in India has been strong but in China it has moderated slightly in line with the Chinese government’s target. The only major black spot is Japan, where the economy has contracted in 2018.

There has been modest growth in the US in 2018 though looking ahead, the outlook for the U.S. economy remains positive with fiscal stimulus and domestic demand expected to boost the U.S. economy over the short-term. In Europe too, growth is sluggish but encouragingly the unemployment rate in the European Economic Area was 8.4% (seasonally-adjusted) in May 2018 – the lowest level since December 2008.

Central banks in most major economies are in the process of gradually tightening their policy stance but, by and large, monetary policy remains broadly accommodative. Financial conditions have also tightened modestly over the last quarter, noticeable in U.S.-dollar money markets and spreads on corporate bonds.

Despite some commentators tipping slower growth next year, KPMG Economics maintains its forecast of global growth with real GDP at 3.9% both for the rest of 2018 and throughout 2019.

So what about Australia?

Exports of mining commodities have picked up in 2018 and boosted growth GDP to 2.6%. The Australian economy added a substantial and encouraging 51,000 (seasonally-adjusted) jobs in June 2018, with the labour force participation rate increasing, although under-employment remains a stubborn problem.

The Government’s $75 billion 10-year national infrastructure plan for the States and Territories should see that employment growth continue, with new infrastructure spending initiatives for the Melbourne airport rail link, Queensland major highway, and rail improvements and projects in Western Australia.

In terms of sectors, the Finance and Insurance Services industry continues to be the largest industry, accounting for 9.5% of the economy’s Gross Value Added. Construction (8.0%), Health Care and Social Assistance (7.9%), Manufacturing (6.4%) and Mining (6.4%) make up the top five largest industries within the Australian economy, accounting for just over 38% of GVA.

Household consumption and retail trade growth both increased modestly in the first half of 2018 although consumer sentiment is currently stronger than it has been for some time, despite the cooling of the property market.

Overall, KPMG Economics forecasts real GDP growth for the Australian economy to be about 2.8% for FY2018 and 2.9% for FY2019 – which is still a full 1% less than our global forecasts.

But all this is dependent on the current geo-political skirmishing not breaking out into a full-blown trade war.  The prospect of the US putting tariffs on another $200 billion in Chinese goods remains, which would have serious implications on global trade. And uncertainty surrounding the outcomes of the Brexit negotiations has grown significantly in recent weeks with high-level resignations from the UK government.

There were some brighter signs late last week as the US and EU agreed to suspend new tariffs in their White House negotiations.

Left alone, the outlook for the global economy is generally benign. But the black clouds of geo-politics remain ominous.

Read the full report, July Economic Update 2018

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