Weekly Economic Briefing: Australia’s new two-speed economy

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!

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.

Australia’s new two-speed economy

The term ‘Australia’s two-speed economy’ gained currency during the mining boom to describe the stark differences in economic conditions between the mining and non-mining states. Between the early 2000s and 2012, the mining sector – and mining-exposed states (principally Western Australia and Queensland) – were doing exceptionally well. Industries that didn’t benefit directly or indirectly from the mining boom were not, and non-mining states lagged well behind.

But then it became Victoria and New South Wales’ turn as the mining boom ended and record-low interest rates prompted housing construction to surge, and jobs and people followed. The housing boom created a ‘two-speed economy’ in reverse.

Now, economic growth is becoming more balanced across both mining and non-mining states. Yet a divide has emerged among Australia’s industries, with a few high-performing sectors set contrasting with a range of stragglers (see chart below).

Chart: Growth in industry output, 2018

Source: ABS, Deloitte Access Economics. Note: excludes Agriculture, forestry and fishing, which fell by 8% in 2018 due to drought conditions.

Health care was the biggest winner in 2018, and is likely to remain a standout performer due to the ageing population and rising demand for health services. The pace of digital change is supporting professional services, while public sector spending is strong on the back of earlier strong stamp duty gains and asset sales.

The mining sector has also outperformed the economy as a whole, with LNG production rising, and mining investment starting to rise once again.

While infrastructure investment is strong, the broader construction sector is underperforming, with housing investment having peaked. Housing investment is likely to fall from here, and the downturn in the established housing market will take real estate services down along with it. So too the retail sector as consumers tighten their belts amid falling house prices. Ditto the parts of wholesale and transport related to retail. Until the very cyclical housing market bottoms out and starts to pick up again, these trends will likely continue.

Depending on what sector you are in, you might either be finding the current economic environment very challenging, or be sailing along not understanding what people are complaining about – there is very little in the middle at present. Welcome to the new two-speed economy.

For more information on the Australian brief, please contact co-authors David Rumbens and Harry Murphy Cruise.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.

  • We were taken by surprise last week by the scale of the downgrade to the OECD’s latest forecast for German growth. The OECD now thinks that German economy will grow by just 0.7% in 2019. This is a big reversal of fortune; a year ago the thinking among economists was that Germany would grow by around 2.0%. At 0.7% German growth would be slower than the euro area as a whole (1.0%) and even the Brexit-embattled UK (0.8%).
  • The slowdown in Germany and the euro area has come faster than expected, with activity slowing in the second half of 2018 and Germany narrowly avoiding a technical recession. The OECD expects the euro area as a whole to grow at the slowest rate since the euro crisis in 2012-13, with the Italian economy dipping into recession.
  • Alarms bells are going off in Europe – and there could be no clearer sign of this than last week’s dramatic reversal of policy by the European Central Bank. In December the Bank ended its quantitative easing programme of monetary stimulus. The message was that it was ‘mission accomplished’ for its eight-year campaign to boost growth. Last week the Bank executed a volte face, announcing more stimulus in the form of cheap loans to banks and a pledge to keep interests at zero through this year.
  • In recent years the German economy has boomed. Its export success, the quality of its vocational education system and its ‘mittelstand’ companies, are the envy of the world. So why has Germany seen such an abrupt change in its fortunes?
  • Part of the problem is that after years of strong growth Germany no longer has the people or the capacity to maintain growth. Unemployment is at the lowest level since the 1970s and 800,000 jobs are unfilled. A recent survey showed that almost half of businesses are turning down new orders. Unlike France or Italy, where unemployment is high and there is plenty of slack in the economy, Germany has simply run out of capacity.
  • Outsiders look at Germany’s export success and its huge current account surplus with admiration. As an export-focussed economy Germany has been able to lock into fast-growth emerging markets and benefit from the global upswing. But in a world of rising protectionism and slowing demand export-dependence acts as a drag on growth. Last year German exports of goods and services grew by only 0.3%, far slower than the growth of the wider economy.
  • The pressures on Germany’s world-beating auto sector are particularly acute. The emissions scandal, and bans on older diesel vehicles in a number of German cities, led to a sharp fall in the output of diesel cars last year. Meanwhile a decline in Chinese car sales last year, the first in a quarter of a century, was a blow for German car makers who are heavily-dependent on the Chinese market.
  • A lack of spare capacity, a slowing global economy, protectionism and the emissions scandal – these are, one hopes, temporary challenges. But lurking beneath them is a much more profound change of a shrinking working age population, which is predicted to shrink 8.8% by 2040.
  • The German economy has immense strength and its recent performance has been outstanding. Its people are enjoying rising living standards and near record low unemployment. Germany has the distinction among major European nations of having run a surplus on its public finances for the last five years. Germany has indeed repaired its roof while the sun has shone.
  • Germany’s scale, its strength and its solvency mean that others see it as Europe’s spender of last resort as growth slows. Last week the OECD argued that Germany is well-placed to boost demand at home and across the euro area by easing fiscal policy.
  • This argument has force given that monetary policy is, on some measures, looking close to exhausted. With rates at record lows there is little scope for further cuts. Additional quantitative easing is limited by rules which prevent the ECB from becoming a dominant lender to any country or from lending too much to highly indebted countries.
  • Certainly there are lots of useful ways in which Germany might spend its budget surplus. Germany’s legendary infrastructure, particularly roads and bridges, are in need of fresh investment. The country spends less as a share of GDP on education than France and the UK. Against a backdrop of a growing threat from Russia Germany’s armed forces look distinctly underpowered.
  • Yet Germany seems as averse to running budget deficits as it is to inflation. The political culture in Germany is one of prudence, not Keynesian-style deficit-financing. As finance minister Olaf Schulz said last month, “The clear precondition of all government budgetary planning is that we achieve a balanced budget, without new debts.”
  • If the euro area downturn gathers pace the clamour for Germany to spend more, and act as an engine for growth, is likely to increase.  As the euro crisis showed, it is at such times that the preferences of different member states conflict.

PS: Last week we wrote about how bubbles in asset markets form and the fact that financial crises tend to be proceeded by credit booms. One such boom has been in leveraged lending which is now a significant source of capital for less creditworthy companies. Last Thursday the Financial Stability Board, a global regulator, launched an investigation into parts of the $1.4 trillion global leveraged loan market, citing potential financial stability risks.

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE 100 equity index ended the week up 0.1% at 7,113.

Economics and business

  • Just three months after the European Central Bank (ECB) stopped its asset purchase programme it has announced the revival of a crisis-era stimulus programme offering cheap credit to euro area banks, it also said it would keep interest rates at current levels until next year.
  • The OECD cut its euro area growth forecasts to 1% in 2019 and 1.2% in 2020, down from 1.8% and 1.6% respectively, in November
  • The OECD also downgraded the UK growth outlook to 0.8% in 2019 and 0.9% in 2020, from 1.4% and 1.1%, respectively, in November
  • UK services sector employment fell at the fastest pace in 7 years in February as uncertainty led companies to hold back on hiring, according to IHS Markit
  • UK retail sales rose by just 0.5% in February as shoppers held back on spending in the face of increased uncertainty, according to the British Retail Consortium
  • China cut its GDP growth target for this year to a range of 6-6.5%, down from 6.5%, blaming its slowdown on the trade war with the US
  • Chinese exports declined by 20.7% in February from the same month a year earlier, the sharpest decline in three years
  • The FT reported that the Chinese tech industry has been hit by job cuts and a reduction in discretionary spending after years of buoyant excess China’s economy is 12% smaller than official data suggest, according to research by the Brookings Institution
  • Italy is preparing to formally endorse China’s controversial Belt and Road global investment project, in a move that is likely to cause tension with Brussels and the White House
  • The US trade deficit rose to a 10-year high of $621bn in 2018, despite US President Trump’s pledge to reduce the imbalance
  • President Donald Trump plans to end preferential trade status for India and Turkey, which allows certain products to enter the US duty-free
  • US wage growth rose at the fastest pace in a decade in February but job creation fell sharply, adding to concerns of a slowdown in the country
  • US productivity rose by an annualised rate of 1.9% in the fourth quarter, slightly above expectations
  • Goldman Sachs is relaxing its dress code in a move seen as increasing the Wall Street giant’s appeal to younger workers
  • Wealthy individuals from Russia and other countries will face stricter rules for investor visas in an attempt by the UK government to clamp down on money laundering
  • In a rare piece of good news for UK productivity, MPC member Silvana Tenreyro said productivity growth had been accelerating at a faster pace than official data suggest
  • The US Fed voted against two actions aimed at mitigating risks to financial stability which was seen by some as watering down post-crisis regulation put in to place during the Obama administration

Brexit and European politics

  • UK prime minister Theresa May is expected to visit Brussels in an attempt to extract last-minute concessions from the EU on the Withdrawal Agreement before MPs vote on the deal on the 12th
  • The Sunday Times reported Conservative Eurosceptic MPs saying they might only support the prime minister’s deal if she promised to step down and clear the way for a Brexiter to lead the talks on the future trading relationship with the EU
  • In a warning to Eurosceptic MPs, Theresa May said the UK ‘may never leave’ the EU if her Brexit deal is rejected
  • Less than half of the UK’s trade deals, struck as a member of the EU, with non-EU countries will have been extended to the UK as an independent trading entity by its currently scheduled departure date
  • The OECD said a no-deal Brexit would likely send the UK into recession and pose a serious risk to global growth
  • UK chancellor Philip Hammond will announce a multibillion pound windfall for the public finances in his Spring Statement on Wednesday, increasing the size of the potential fiscal stimulus if MPs back the Brexit deal, the FT reports
  • Flights between the UK and Europe should continue in the event of a no-deal Brexit after the UK matched the EU’s offer to protect airlines’ flying rights until the end of March 2020
  • The Equalities and Human Rights Commission is considering launching an investigation into anti-Semitism in the UK Labour Party
  • French President Emmanuel Macron called for a European ‘renaissance’ to fend off resurgent nationalism
  • The Bank of England (BOE) warned that the UK should expect “significant market volatility” in the event of a no-deal Brexit
  • The BOE and ECB set up a euro swap facility to ensure financial markets can function in the event of a no-deal Brexit
  • BOE governor Mark Carney said that recent no-deal preparations will lessen the impact of a disorderly Brexit

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