Looking back from early in the New Year, 2016 ended up a year of black swans – from the rise of Donald Trump and to Brexit (not to mention the Western Bulldogs and Cronulla Sharks winning the AFL and NRL premierships respectively), events showed how orthodox opinion and expectations often missed the mark.
And so year 2017 is now set to be shaped by these events (although by some more than others).
The main question on everyone’s mind is what effect will President Trump have on both the US and global economies. So far, the perceived positives to business of Federal stimulus through tax cuts and infrastructure spending, as well as reduced financial regulation, have sparked a rally in equity markets and for the US Dollar. However the extent of proposed measures to restrict migration and free trade are less well known, along with changes to health, social and environmental initiatives, and will likely play out over a longer time period and according to the complex politics of Capitol Hill.
Another important question for Australia is whether (and to what extent) China’s rate of economic growth slows further. China remains our largest export destination and a key source of overseas investment, so its growth can’t be taken for granted. State-owned enterprises are highly leveraged, presenting significant risk. And while global commodity markets rallied on renewed industrial stimulus from China, future economic growth for the country is likely to be less resource-intensive than in previous periods, making commodity prices an important indicator to watch.
Australia’s great post-mining boom rebalancing will continue. Mining investment will continue to decline in 2017 and this, combined with continued weak wage growth and slow jobs growth suggests there is substantial spare capacity in the economy.
Housing construction and government infrastructure investment filled some of this gap in 2016. However, the release of the September quarter National Accounts showed what happens when these go missing (the Australian economy contracted during the quarter). So Australia will need a return of non-mining business investment if economic growth is to rebound strongly.
The RBA has helped the transition by keeping interest rates very low, which has also maintained downward pressure on the Australian Dollar. With no likelihood of increased in local official interest rates in 2017, likely higher interest rates in the US, and potential lower commodity prices, will keep the downward pressure on the $A.
So what are the imperatives for 2017?
For the Australian economy, it is about a return to growth. It went backwards in the September quarter of 2016, and failed to create many new jobs through the course of the year. Lifting business investment will be important to renewing growth, and this will need an environment where business confidence is strong.
As always, productivity growth – spurred by factors such as innovation, skills development, and competition reform – also remains number one when it comes to ensuring longer term growth in living standards.
For government, it’s about providing a supportive environment to allow for improving living standards over time. Importantly, as voter backlashes in the US, UK and Australia in 2016 showed, delivering inclusive growth is key – making sure the benefits of an expanding economy can be, and are, shared more broadly.
2017 will provide a tricky balancing act, as those objectives will need to play off against ongoing budget repair. The Federal government got a respite from the ratings agencies late last year but, if anything, the task of budget repair remains harder than easier.
Finally, for economists, advisers and commentators, in 2017 it will be more important than ever to deliver robust analysis. With post-Brexit negotiations on the agenda in the UK and Europe, and an unorthodox administration about to take control in the US, the year will deliver many new proposals and initiatives to consider.
The economics tool kit still provides a valuable framework to assess proposed changes. Now is not the time to go to water, and keen economic analysis can inform outcomes and deliver real benefits to governments, business and society.
David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.