Weekly economic briefing: Can’t buy me love – Australia’s weak public finances and political instability

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Can’t buy me love: Australia’s weak public finances and political instability

The recent change in the Liberal leadership – giving Australia its sixth Prime Minister since the 2007 election – is the most obvious sign of Australia’s political instability over the past decade. But it’s not the only one. First-term governments have also increasingly struggled to retain the support of the electorate – both Labor and the Coalition won second terms, in 2010 and 2016, but only by the skin of their teeth. At the state level, voters removed one-term governments in Victoria and Queensland in 2014 and 2015, events previously almost unheard of.

So why so much political instability in Australia over the past decade? Maybe the chart below offers a clue. Since the 2008 GFC and the peak in the terms of trade in 2011, government revenue growth has been very weak, and governments have been trying hard to get the budget back into the black. That has meant government spending has been growing only slowly – far slower than during the politically more stable Hawke/Keating and Howard eras.

Over the past decade, governments have neither had the ability to pay for needed reforms (by compensating the losers or bribing the states) nor to offer lollies to the electorate (such as income tax cuts). This, we suggest, has constrained governments, both in appearing effective and in being electorally popular.

It’s the economy, stupid!

In other words, it appears that the economy has spilled over into politics. Unlike in Europe or North America, which experienced deep and protracted economic downturns after the GFC, Australia has experienced a slow-burn downturn in government finances – no crisis, but no war chest of funds either. The dissatisfaction among voters, and the upset to the political status quo, has been evident.

Looking at the Federal government’s own spending forecasts for the next four years, this may not change any time soon.

Chart: Real growth in government spending (period averages)

Sources: 2018-19 Budget and Deloitte Access Economics
Note: excludes personal income tax cuts, which were significant especially during the Howard era

For more information on the Australian brief, please contact co-authors David Rumbens and Craig Michaels.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

What happened over summer?

  • The summer months tend to be pretty thin for media coverage of economics and finance. Like the rest of us, journalists take their holidays in July and August. Yet economics is no respecter of holidays and events and data have continued to pile up.
  • With the summer holidays drawing to an end here’s our two-minute take on what has happened in the ten weeks, since the middle of June.
  • The trade spat between the US and China intensified over the summer. The US imposed a 25% tariff on $50bn worth of Chinese imports and the Chinese responded in kind. Rising tensions over trade are taking a toll, fuelling capital outflows from emerging markets and weakened growth prospects. The chairman of the US Federal Reserve, Jerome Powell, has said that concerns about trade have led to US firms postponing “investment, hiring and making decisions”.
  • Yet protectionism seems more likely to dent, rather than derail growth. The IMF recently estimated that trade tariffs and other measures announced so far could reduce global GDP by as much as 0.5% by 2020. This is not trivial effect, but it would take only small bite out of global growth – the IMF forecasts the world economy will expand by more than 10% over this period.
  • Nor is support for trade dead. In July the EU and Japan signed the world’s largest bilateral free trade deal, lifting tariffs on nearly all goods traded between the two countries. Despite America’s withdrawal from the Trans-Pacific Partnership trade pact the remaining 11 signatories went ahead and ratified the agreement in July. Last week the US signed a revised trade agreement with Mexico. Talks on a deal between the US and Canada resume on Wednesday, though trade in agricultural goods remains a sticking point.
  • Mr Trump’s scepticism about trade does not seem to be shared by US voters. Last week a poll from the Chicago Council on Global Affairs showed that a record 85% of Americans see trade as being good for US “consumers like you”. A record 67% think trade is good for US jobs, up from 40% in 2016, and 82% rate trade as being good for the US economy. Most Americans believe the US should join the Trans-Pacific Partnership and think that the US-Canada-Mexico NAFTA trade agreement, to which Mr Trump is strongly opposed, has been “mostly good”.
  • Emerging market economies have had a tough summer, with US protectionism and rising US interest rates knocking sentiment and leading to outflows of capital. Emerging market currencies have suffered, with the Chinese yuan experiencing its worst month on record in June. As the primary target of US tariffs China has seen its growth prospects dim and equities have sold off, with the Chinese market down 16% since mid-June.
  • The damage from protectionism and rising US interest rates has been exacerbated for some emerging economies by home grown weakness, bad policy and politics. For Argentina the problem is high levels of government debt and runaway inflation. The roots of Venezuela’s misfortunes lie in two decades of socialism which has left the market economy in tatters and led to a collapse in oil output. Turkey has been hit by US sanctions designed to secure the release of an imprisoned US pastor. Meanwhile, political involvement in monetary policy has sapped market confidence and a collapsing Turkish lira has sent debt costs for the many businesses with foreign currency debt soaring. Over the summer the travails of the Turkish, Venezuelan and Argentinian economies turned into full-blown crises.
  • In complete contrast the US economy is sailing along, with growth at a heady 4.2% annualised rate in the second quarter, the fastest rate in almost four years. The US consumer is in good shape with confidence hitting its highest level in 18 years in August. The decision of the US Federal Reserve to raise interest rates in June, and the general expectation the Fed will hike twice more this year, testifies to the momentum of the America’s recovery.
  • Global equities have had a lacklustre summer, with the only real growth coming from the US where equities have risen 5% since mid-June. The US bull market is fairly narrow, with tech stocks the major outperformers. Apple and Amazon rose by 20% and 17% respectively over the summer. Chinese tech stocks, which have done well in recent years, are suffering from the slowdown in their home market. Alibaba and Tencent have fallen by around 17% since mid-June.
  • In the commodity markets, cuts in OPEC production have supported oil prices which are up 6% since mid-June. However, weakness in China and other emerging markets have hit prices of other commodities, especially metals. The price of zinc is down by almost a quarter since mid-June and copper hit a one-year low in August.
  • In the UK growth bounced back in the second quarter after a poor start the year supported by a pickup in the services and construction sectors. In a sign that it thinks growth has further to run the Bank of England raised interest rates in August.
  • The summer also saw the launch of ‘the Chequers plan’ – a cabinet agreement on a set of goals for the UK’s Brexit negotiations. Despite widely being seen as a blueprint for a softer Brexit, practically keeping the UK in the single market for goods, the plan would require the EU to make significant concessions, particularly on free movement of labour. This has raised the likelihood of a no-deal Brexit. Last night Michel Barnier, the EU’s chief negotiator, said that he is strongly opposed to key parts of the Chequers proposal. The odds offering by bookies Betfair imply a 48% probability of the UK leaving the EU without a deal in March 2019.
  • Meanwhile, opinion polls show that support for the Conservative party has edged lower following the Chequers announcement and Labour and the Tories are now running neck and neck. Brexiteers unhappy with the Chequers deal have swung to UKIP, which has seen a rise from very low levels in its support over the summer.
  • European economic data indicate a continued softening of growth, with manufacturing activity slowing to its lowest levels in more than a year and a half and consumer confidence dropping sharply in August. Economists downgraded this year’s GDP growth forecasts for Germany, France and Italy over the summer. European equities sold off and are now down 7% from their April peak.
  • Concerns over Italian banks’ exposure to the crisis in Turkey and the spending plans of a populist coalition government cobbled together in May have spooked investors. Italian equities are down 15% since early May and yields on Italian debt hit a four-year high.
  • So, what do the last couple of months’ news add to our understanding of the global economy?
  • America is moving into top gear, but it looks like an outlier. The weight of data, especially from emerging economies and the euro area, suggest that the momentum of global growth is slowing.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 2.0% at 7,429, as the rebound in sterling hampered the overseas earnings of large multinational corporates.

International economic briefing by Ian Stewart

Economics and business

  • President Trump raised global trade tensions by threatening to pull the US out of the WTO unless other members ‘shape up’
  • EU trade commissioner Cecelia Malmstrom said that Brussels would be willing to remove all tariffs on cars if the US reciprocated
  • US corporate profits registered the fastest rise in six years in Q2, up 16.1% from a year earlier – boosted by lower taxes and strong economic growth
  • US consumer confidence rose in August to its highest point since 2000
  • The FT reports that the gap in yield between the safest and riskiest US commercial real estate-backed securities has fallen to its lowest since before the financial crisis, as the hunt for returns drives investors to riskier assets
  • Argentina increased interest rates 15 percentage points to 60% in a drastic move to halt the slide of the Argentinian peso, which has lost more than half its value so far this year
  • The IMF said it will look at revising its bailout for Argentina after its president, Mauricio Macri, asked for the Fund to speed up disbursement of a $50bn package
  • The FT reports that labour shortages in central and eastern Europe are challenging the region’s successful economic model – with 86.6% of industrial companies in Hungary and 49.7% in Poland reporting labour shortages
  • Businesses in Poland now report that 1-2m Ukrainians are working in the country, in what the FT describes as “one of Europe’s biggest, yet least visible, migrations.”
  • Investors withdrew $446m from funds that specialise in UK equities in the week to Wednesday 29th August, according to data from EPFR Global
  • The outflows mark the 25th consecutive week of redemptions – their third longest on record
  • UK consumer borrowing growth slowed sharply in July
  • The headline measure of euro area economic sentiment fell in August driven by a sharp fall in euro area consumer confidence
  • Euro area service sector firms “significantly” cut their outlook on future demand, according to data from the European Commission
    German retail sales fell at a worse-than-expected monthly rate of 0.4% in July
  • Luxury British carmaker Aston Martin announced plans to float on the London Stock Exchange, following record sales and profits figures
  • The board of Grindr unanimously approved plans for the West Hollywood-based dating app, which has 3m users globally, to go public
  • British household appliance-maker Dyson announced plans to build a new facility in the South of England to test and develop electric cars

Brexit and European politics

  • The pound rose after the EU’s chief Brexit negotiator, Michel Barnier, seemingly struck a more optimistic tone on Brexit negotiations, saying the EU is “prepared to offer a partnership with Britain such as has never been with any other third country.”
  • However, various media reports suggest the UK and EU now admit a Brexit deal is unlikely by October and are aiming for November instead
  • The French Prime Minister, Edouard Philippe, said his government is preparing “contingency measures” in case of a ‘no-deal Brexit’
  • Reports suggest Germany is considering providing emergency financial assistance to Turkey as concerns grow that a full-blown economic crisis could destabilise the region
  • The Wall Street Journal reports that a particular concern among German officials is that a crisis in Turkey could undo the deal between Berlin and Ankara on Europe-bound refugees passing through the region
  • The latest figures from the UN show that 67,000 migrants have entered Europe by sea so far this year, down from 123,000 who arrived by August in 2017 and 273,000 at this point in 2016
  • Panasonic blamed potential Brexit uncertainties for its decision to move its European headquarters from the UK to the Netherlands – although the move will involve only around 10 staff relocations
  • The British government is to fund the development of an independent satellite-based navigation system to hedge against the UK’s possible exclusion from a similar EU project because of Brexit

And finally…

  • A new patent filing suggests IBM is considering adapting ‘smart coffee’ delivery drones in its offices, with sensors used to scan for people who have ordered coffees, as well as those who appear to be in a “pre-determined cognitive state” requiring a caffeine boost – espresso delivery

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