As the year nears its end, the global economy has proved so far to be resilient to the growing backdrop of trade tensions. But I suspect this may change in the near future.
For most of 2018, the performance of many major economies has been strong, and in our latest Quarterly Economic Outlook, KPMG Economics predicts that growth for 2018 will be 3.8 percent.1 This has been achieved without any significant inflationary pressures, although several countries are now tightening monetary policy in response to fears that the inflation genie might start scrambling out of the bottle.
Growth rates differ considerably of course. India’s recent rate is 8 percent, China’s is 6.5 percent, while Japan’s is 0.7 percent. In Europe meanwhile, the region-wide growth rate is 0.4 percent. And there have been some notable flashpoints of economic distress – notably Venezuela, Argentina, Turkey and South Africa. But overall, global economic growth has been fairly solid.
But we believe going into 2019 there may be slightly weaker growth. This is due to a number of macroeconomic factors, but particularly a possible ratcheting-up of the US/China trade war – and the endgame of the Brexit saga. We also query the ability of emerging economies to manage their foreign-denominated debt exposure in the face of a strengthening USD, driven by rising bond yields in the US.
As things stand, there will be further US tariffs on Chinese goods on 1 January 2019. In previous reports, KPMG has spelled out how dangerous it would be if other countries joined this trade war.
On Brexit, so much depends on whether the deal agreed by Theresa May and the EU gets through the UK parliament next month. If it does not and the UK crashes out with no deal, the likelihood of flat or negative growth in the short-to-medium term for the region increases.
So what about Australia? This year, the economy has recorded strong growth; higher than most expected.
The labour market is improving, with well over 200,000 more people employed this year. Unemployment is steady at 5.0 percent as at October 2018, while underutilisation – i.e. people who want to work more hours – is at its lowest level for five years.
There has been a slight reversal in the trend towards part-time employment – with the proportion of full-time employed people increasing marginally during each the last five months.
We have seen this phenomenon of the ratio of part-time to full-time employment reaching a low point of around 68 percent three times in the last three years, only to see the ratio rebound, albeit slightly. This pattern does however raise the question whether there is a minimum ratio, such as 1:2, for part-time to full-time workers in the Australian economy given its current structure.
Wages growth still remains fairly subdued, recording annual growth of 2.3 percent, although this is still higher than the 1.8 percent inflation rate.
Consumer sentiment, as measured by the Westpac-Melbourne Institute Index of Consumer, rose 2.8 percent in November to 104.3 from 101.5 in October. This result marks the 12th consecutive month where the number of optimists outweighed the number of pessimists, which is a notable turnaround from 2017 which saw pessimists in the majority for 11 months out of 12. Within the latest result, respondents were indicating a high degree of positivity towards their own financial position, despite the fact that housing prices are declining in several markets around the country and equity prices continue to slide from their peak late August 2018. This confidence going into 2019 is important.
KPMG’s growth expectations for Australia in FY19 and FY20 remain positive, albeit softer than last year. Influences such as the extreme drought conditions and the acceleration in the downturn in the housing market are expected to be a drag on growth with GDP growth2 moderating to 2.8 percent and 2.4 percent respectively for the next two financial years.
Given the geopolitical backdrop, there is inevitable uncertainty about our position as a medium size economy heavily dependent on imported capital. Better than expected outcomes on Brexit and US/China trade tensions would be the biggest Christmas and New year presents we could have.
1. Calculated as CY GDPt/ CY GDPt-1
2. Calculated as FY GDPt/ FY GDPt-1