Chief Economist Brendan Rynne’s quarterly economic update
We have not seen such an uncertain global geo-political scene for some time. KPMG’s latest Quarterly Economic Outlook shows an escalation in those geopolitical risks is creating increased uncertainty in the short-term outlook of global economic growth.
Some of those global factors include:
- Elevated uncertainty continues to drag on manufacturing and business investment in the US.
- The possibility of a no-deal Brexit still looms. Indicators pointed to a contracting production sector and deteriorating economic sentiment in the UK.
- Manufacturing recession in the Eurozone is expected to persist, although the services sector may provide an upward trajectory for the economy in the area.
- The Chinese economy has continued to face softening domestic demand, with the automotive sector suffering further shrinkage in production and sales of passenger cars and commercial vehicles.
- A considerable number of Asian countries have taken a hit from the US-China trade disputes due to integrated regional supply chains.
That is just the start. Increased political unrest in Italy and Argentina; rising trade tensions between Japan and South Korea; social unrest in Hong Kong; the loss of self-determination in Kashmir; the prospect of a military conflict involving Iran, plus the continuation of instability in Venezuela, Ukraine and the Middle East have all combined to make the current global environment more tense, more challenging and more fragmented than any other time in the recent past.
Not surprisingly, the latest OECD’s Interim Economic Outlook also pointed to an increasingly ‘fragile’ and ‘uncertain’ global economy with mounting downside risks. The OECD’s May 2019 Economic Outlook has been revised downwards for almost all countries, especially those most vulnerable to the weakening of world trade and investment. Trade tensions were again identified as the major factor that undermines confidence, growth and employment worldwide.
Most central banks across the globe have loosened their policy rates further to fight the persistently muted inflation and pre-empt the gloomy economic outlook. Risky asset prices rebounded, and government bond yields continued to slide. The inversion of the yield curve in a number of economies, which tends to be an indicator of a coming recession, was exacerbated due to stock market jitters, further pushing long-term rates down.
The actions of overseas central banks have had a direct impact on Australia, as they have pressured the RBA to cut rates here further than they may have ideally liked – so as not to allow upward pressure on the Australian dollar, which would damage exports.
The interconnectedness of the global economy is shown perfectly.
The Australian economy is sluggish but we believe will start to pick up. Soft conditions in the second quarter of 2019, with GDP growth falling further to 1.4 percent year-on-year, were in line with KPMG forecasts in our July Quarterly Economic Outlook. On a quarterly basis GDP growth was 0.5 percent quarter on quarter in Q2 2019. Contributors to the fall in year-on-year GDP growth included a 5.2 percent year-on-year decline in both private investment and investment by public corporations.
But on a positive note the trade balance continued to improve in the June quarter as exports grew by 2.9 percent year-on-year (compared to 2.2 percent in Q1 2019) and imports fell by 2.8 percent year-on-year (compared to -0.7 percent in Q1 2019).
Growth in household consumption in the near future is expected to remain soft due to weakening employment growth and continued marginal real wage growth. Further signs of turnaround in the housing markets signal positive wealth effects on private consumption.
Recent interest rate cuts and fiscal easing through tax rebates for low to middle income earners are expected to take effect later in the year and provide a necessary stimulus.
Housing investment is expected to remain weak in the short term, while business investment is anticipated to turn around in 2020 with positive growth returning as business confidence regains momentum. Government consumption and investment will continue to support growth, but unless new programs are announced, will dissipate towards the end of 2022.
We expect the cash rate to fall to a low of 0.25 percent by mid-2020 and stay at these levels until signs of inflation edging closer to target and lower unemployment are evident as per the RBA’s forward guidance.
Annual GDP growth is projected to rise to 1.9 percent in the second half of 2019 and continue to increase gradually through to 2022, when we forecast it will reach 2.6 percent.
Slow steady progress is the outlook, but in an uncertain world, it could be worse.