Dr Brendan Rynne, Chief Economist 4th quarter economic update
The decade may have changed but the picture for the global economy has not – we seem set for a prolonged period of slow growth.
It is true that as 2019 drew to a close and 2020 started, some of the major uncertainties impacting the world economy in recent months and years appeared to be resolving themselves.
The General Election in the UK returned Boris Johnson’s Conservative Government with a handsome majority and a mandate to implement Brexit. It cannot be understated how the uncertainty associated with the UK’s decision to leave the European Union has impacted the British economy over the past three years‑latest monthly data suggests likely growth of just 0.1 percent in the fourth quarter of 2019; resulting in a tepid annualised GDP growth rate of 1.3 percent for the whole year and down slightly from 1.4 percent in 2018.
But despite welcome clarity emerging from the election there still remains considerable ambiguity surrounding how the departure of the UK from the EU – now scheduled for the end of this month‑will practically impact residents, households, businesses and government on a day-to-day basis. This year will be spent in negotiations between the UK and EU on the future trading relationship. It would be rash to expect 2020 to see any increase in the growth rate.
After two years of trade tensions between the US and China, a Phase 1 deal aimed at de-escalating the long-running trade dispute was signed last week (16 January), which at least, is a start. But there is also a growing recognition that ‘bifurcation’ is occurring in global technology between China backed solutions and US backed solutions. This is set to be a key issue for the rest of the decade.
Encouragingly, in this era of increasing protectionism, the renegotiated US, Canada and Mexico free trade deal, which is replace NAFTA, also received approval in the US Congress. Staying in the Americas, a new Government under President Alberto Fernandez has been formed in Argentina with a policy framework of increasing state spending and targeting growth through stimulatory monetary and fiscal policy settings.
Despite these positive outcomes there remains a range of geopolitical and economic issues continuing to create tensions and pressure in various countries and regions, including the increasing divisions regarding the political and economic solutions for responding to climate change; general strikes in France regarding proposed pension reforms by the Macron government; and now escalating tensions in the Middle East between Iran and the US;
Closer to home, in Asia, China and India are expected to experience slower growth rates than their average in recent years although Vietnam, Indonesia and Singapore are all forecast to continued steady growth.
While the global growth figure for 2019 is not yet known, the ongoing impact of the US-China trade dispute, combined with challenges in various product markets, such car manufacturing, means global industrial production and world trade growth last year is likely to be lower than previously forecast. This is even though interest rates across many advanced economies have continued at very low levels compared to historical averages.
Our forecast for global GDP growth for both 2019 and 2020 has been reduced to 3 percent, which represents the weakest rate of global GDP growth since the GFC. We expect global growth to strengthen a little in late 2020 and into 2021 on the back of a return to growth in emerging economies. Our medium term outlook remains one of overall moderate global growth based on a number of pervasive structural factors, including slower credit growth across advanced countries,
So what of Australia?
Of course the story this summer has been one of the worst natural disasters the country has experienced in decades. The raging fires that to date have destroyed nearly 2,000 houses and burnt more than 2 million hectares have come on top of, and caused to a large extent by, the worsening drought conditions that have affected much of rural Australia for the past few years.
It is too early to tell with any degree of accuracy the size of the impact these events will have on the national economy‑but it will clearly be negative, possibly in 2019 Q4 but very likely in 2020 Q1. Lower consumption and lower business activity may be countered by higher government spending, but the likelihood is the net effect of these two counterbalancing effects will still be negative.
Those impacts, combined with the loss of biological assets and a pause in investment activity as the nation seeks to bring these natural disasters under some level of control, suggests economic activity for Australia at the beginning of the new decade is highly likely to be lower than previously forecast.
Even before this terrible summer the Australian economy had been performing relatively poorly, compared with recent history. GDP data for 2019 Q3 was weak, recording a lift in annual growth from 1.6 percent to 1.7 percent. While this result still confirms RBA Governor Lowe’s assessment that the economy has reached a “gentle turning point” quarterly growth actually softened from 0.6 percent q/q in 2019 Q2 to 0.4 percent in 2019 Q3.
Notably domestic final demand remains extremely soft, with consumer spending virtually flat over the quarter as households sought to increase their savings rather than spending the rise they enjoyed in their household disposable income (due to tax cuts as opposed to wages growth). The collective effects of high household debt, low consumer confidence and a soft outlook for the labour market are understandably dampening private spending.
All of these factors suggest the RBA will continue with its downwards trajectory for the cash rate early into the new year; most likely with another 25bp reduction in February and another one around the middle of the year. This would then bring the cash rate into the 0.25 percent territory‑the RBA’s self-assessed ‘lower bound’ – which is the rate nominated for potential adoption of quantitative easing. KPMG remains sceptical that QE will be implemented by the RBA – we believe it is more likely that this unconventional policy action will be avoided by the thinnest of margins.
While the effect of the fires throws a caveat around any predictions, we will stay with our belief that, by the end of the year, Australian GDP will be growing by 2.3 percent compared to the current low point of 1.9 percent. Stay safe and take care of those around you.
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