Third quarter economic results: can the global economy pull Australia along?

The outlook for the global economy is increasingly healthy.

Amongst the advanced economies, Europe, Japan and the U.S. have seen improved economic activity over the second quarter of 2017.

Growth in China has also edged higher over the same period. Momentum is expected to continue into the second half of 2017 with leading survey-based indicators suggesting an up-tick in global economic sentiment.

It is true however that monetary policy remains accommodative —although policy tightening has commenced in some advanced economies and gradual tapering has been signalled in the major advanced economies.

“Quantitative Tightening” has replaced “Quantitative Easing” as the new buzzword amongst economists and analysts. And of course we still await that long-mooted increase in interest rates by the US Federal Reserve

So on balance of risks, in our latest Quarterly Economic Outlook KPMG Economics maintains its forecast of global growth for 2017 with real GDP at 3.0 percent lifting to 3.4 percent in 2018.

So does this healthier global backdrop affect Australia? Yes – and we may already be seeing it in the improved domestic tax revenues announced this week. The extra $4.4bn garnered between the May Budget and the end of the 2016/17 financial year is the biggest for over a decade.

It is fair to say we could do with more of it – while the Federal Government’s debt position remains low by global standards it is high from a historical Australian perspective. In the 2017-18 Budget Papers, net government debt is projected to be 19.5 percent of GDP in 2017-18 and peak at 19.8 percent of GDP in the next financial year

Those public debts are mirrored by household borrowing, which has continued to rise. The Australian household debt-to-income ratio has been rising over the past decade reaching record levels (debt-to-income of 190.4 in March 2017).

Recently, the ABS, based on their Household Income, Wealth and Expenditure Survey, found that the average amount of debt (inflation-adjusted) has almost doubled in the past 12 years — from $94,100 in 2003-04 to $168,600 in 2015-16. This is a worry –  with interest rates now looking set to rise – and will limit household consumption activity.

The Australian economy posted a current account deficit of $9.56 billion in Q2 2017, equivalent to 2.7 percent of GDP, the largest deficit in three quarters as the trade surplus dipped to $0.46 billion. Exports of goods and services declined 2.0 percent to $31.07 billion. But Australian exports are still expected to remain strong over the year supported by healthy demand for commodities.

But growth-wise, things are more promising. The Australian economy grew by 0.8 percent q/q (seasonally-adjusted) in the June quarter of 2017 rebounding from the weak 0.3 percent q/q growth in Q1 2017.

On an annual basis, the Australian economy grew at 2.0 percent y/y (or 1.8 percent on a rolling 4-quarter basis) increasing from 1.6 percent y/y in Q1 2017. Growth was relatively broad-based with domestic final demand and net exports contributing strongly.

And encouragingly, capital expenditure was up, after a prolonged decline. Private investment in Australia has been relatively week in recent quarters but Q2 2017 saw an increase of 0.8 percent q/q (seasonally-adjusted) in private capex. This was the second consecutive quarter of positive growth in private investment

The Australian economy also added a healthy 54,200 (seasonally-adjusted) jobs in August 2017 bringing the total number of employed people to 12.27 million. This was the largest increase since October 2015, although overall, labour market conditions remain steady with the unemployment rate at 5.6 percent in August 2017.

Spare capacity in the labour market still exists and the associated unemployment gap – and under-employment – remains.

Labour costs stay subdued with Australia’s seasonally-adjusted Wage Price Index growing by just 0.5 percent in Q2 2017.  RBA Governor Philip Lowe summed up the predicament during testimony to lawmakers recently, noting that wage growth in Australia has slowed more than productivity growth and that “the consequence of that is that the share of national income that is going to capital is at a five-decade high and the share going to labour is at a five-decade low.”

This reflects a 2016 KPMG study that showed that over the last 20 years labour productivity has not been the major problem it is often believed to be.

KPMG maintains its forecast for the unemployment rate at 5.4 percent for 2018. And we believe real GDP growth will be around 2.9 percent for 2017-18.

The domestic picture is reasonably encouraging, but with some economic indicators causing concern. We may need the global economy to keep pulling us along.


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