Weekly economic briefing: Australia’s place in the world – OECD outlook

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.

Australia’s place in the world – OECD outlook

In the OECD’s latest Global Economic Outlook, its Chief Economist Catherine Mann says that things are “…better, but not good enough.” According to the report, global growth is expected to pick up modestly in 2017, with some further upside opportunity, while productivity and wage growth will remain subdued and financial stability risks will persist.

So where does Australia sit in comparison to the rest of the world in the OECD’s analysis? In good news, we’re outpacing the top seven advanced major economies as outlined below.

OECD economic growth forecasts

weekly-ecn-briefing-040717-1.png

Source: OECD

 

The OECD is forecasting Australia’s economy to grow by 2.5% over 2017, before picking up in 2018 to achieve growth of 2.9%. And its population growth that is giving us an advantage over our rivals.

While Australia’s population is increasing by about 1.3% per year, Japan’s population, for example, has been falling since 2008. Italy has zero population growth and Germany and France are around 0.5% each. And when measured on a per capita basis, economic growth is actually more consistent across the countries (see the chart below).

OECD economic growth forecasts, controlling for population

weekly-ecn-briefing-040717-2.png

Source: OECD, UN, Deloitte Access Economics

 

Recent public infrastructure investment in Asia is one key driver for the OECD’s forecasts of accelerating growth. In particular, China is continuing to support industrial activity and new investment, which has significant implications for Australian suppliers, while providing some support to commodity prices generally. This is expected to be a key driver for Australia’s economy in 2018.

It should be noted though, that the OECD isn’t as optimistic about Australia as it was last year. Its forecasts for the last two Global Economic Outlook releases are summarised below.

Australia’s OECD growth rate forecasts

Year November 2016 Economic Outlook June 2017 Economic Outlook Change
2017 2.6% 2.5% -0.1%
2018 3.1% 2.9% -0.2%

Source: OECD Global Economic Outlook June 2017 and November 2016

 

And the OECD also warns that stimulus from China cannot continue forever. China’s credit binge to fund infrastructure and housing investment is expected to moderate over the next two years as its government steps in to dampen high levels of borrowing. This over-capacity is something that Australia needs to be aware of as possibly our biggest downside risk, given China’s status as the recipient of a third of our exports.

The OECD also points to risks in Australia’s housing market, observing that our house prices look overvalued, even when allowing for population growth – something we have in common with Canada, Sweden and the UK.

Special focus: Does trade lead to inequality?

The special focus of this year’s June OECD Outlook examines how nations can better share the benefits of trade, an important inquiry given the swings towards protectionist rhetoric amongst many advanced nations.

The OECD notes that Australia is well integrated into global markets despite its geographical position. But within Australia, it observes that “…inequality needs to be contained.” The OECD recommends that improving labour market skills and providing better paths for disadvantaged individuals to get jobs is one way to improve this.

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

 

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/

Savings slump, credit booms

  • News last week of a collapse in the UK savings ratio and a surge in consumer borrowing suggest that the consumer party may be getting out of hand.
  • Perhaps we shouldn’t be too surprised. Following the financial crisis the Bank of England slashed interest rates and printed money to kick start the economy. Consumers have responded in text book fashion.
  • The latest credit numbers testify to the heady effects of cheap money and financial innovation on borrowing. A rising tide of on-line and contactless transactions and a new form of motor financing, Personal Contract Purchases (PCPs), offer new opportunities to borrow. In the motor industry PCPs have supplanted traditional credit arrangements and now account for over 80% of all new car purchases.
  • The fall in the savings ratio, to just 1.7%, the lowest level since 1963, is pretty dramatic. As recently as early 2016 the ratio stood at 6.1% and over the last 54 years it has averaged 9.2%. The fall in the ratio fits with a world of buoyant consumer confidence and low returns on savings. But it also suggests that consumers have been saving less to sustain spending.
  • To assess just how stretched the consumer sector is we need a broader picture, one which includes mortgages and the asset side of consumers’ balance sheets.
  • The bulk of consumer debt, some 85%, is accounted for by mortgages. Tougher regulation and greater caution on the part of lenders mean that growth in mortgage borrowing has been pretty subdued. Over the last 12 months mortgage borrowing rose by 2.8% compared to a 10.3% increase in overall personal borrowing and a 15.0% rise in car finance deals.
  • With mortgages accounting for the lion’s share of borrowing and growing only slowly, overall levels of consumer borrowing relative to GDP have declined in recent years. The ratio of UK household debt to GDP peaked at 173% in 2007 before falling to 150% in 2015, the latest year for which data are available.
  • Consumer debt levels are lower in many other countries, including the US, France and Germany, but at 150% the UK debt to GDP ratio does not look extreme by international standards. Denmark, the Netherlands, Norway, Austria and Switzerland, are running ratios well in excess of 200% of GDP.
  • An alternative measure of sustainability, comparing debt to household assets, also looks reassuring.
  • Rising equity and house prices have pushed up the value of household assets faster than the growth in consumer borrowing. As a result, the ratio of consumer debt to assets has dropped from 20% to 15%. So in aggregate, the value of UK consumers’ asset are almost seven times higher than their debts.
  • But this broader, benign view requires interest rates to stay low – at least until we see sustained growth in consumer spending power. Higher interest rates would mean higher debt serving costs and could trigger a fall in asset values. In the past sharply higher interest rates and falling house and equity prices have been the catalyst for consumer recessions.
  • Today the value of consumers’ earnings are falling as inflation surges. But the scope for consumers to finance spending by borrowing more or cutting back on saving is limited. Banks are already tightening criteria for granting consumer credit. And levels of savings from income are at historically low levels.
  • There is one further important issue: the question of the distribution of debts and assets across consumers.
  • The last 20 years have seen a sharp rise in levels of student debt. In 2016-17 student debt stood at almost £90 billion, equivalent to roughly 7% of total existing household debt. Because student debt is backed by the government and repayments are contingent on income, it is not included in the official measure of household debt. Yet in coming years student debt will become an increasingly drain on consumers’ incomes as new generations leave higher education.
  • Meanwhile rising house prices have raised the value of older consumers’ assets but made it harder for younger consumers to get on the housing ladder. The Resolution Foundation think-tank reports that the likelihood of a millennial owning their own home at the age of 30 is half that of a baby boomer household at the same age.
  • The result is an increasing polarisation of debt and assets between younger and older consumers.
  • To me there are two obvious messages to be drawn from all this. Consumer spending is set to slow markedly over the next couple of years. And the distribution of assets and debt between the generations will remain a hot political subject.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 1.6% at 7,313.

Global government bond prices have been falling as investors continued to anticipate the unwinding of central bank monetary stimulus in advanced economies. Last week we saw further signs that the Bank of England may be inching towards a rise in UK interest rates as Governor Mark Carney said it was an issue “we will debate in the coming months.” But Mr Carney has since calmed markets by saying “this is not yet the time” to raise borrowing costs.

International economic briefing by Ian Stewart

Economics and business

  • UK consumer confidence fell in June to its lowest level since shortly after last June’s Brexit vote
  • UK workers are “frustrated and squeezed” according to the Bank of England’s chief economist, Andy Haldane, following a decade of flat real wage growth
  • Support for higher taxes and increased public spending is at its strongest in a decade among UK voters, according to the Social Attitudes Survey
  • Economic sentiment in the euro area rose in June to its highest level in almost 10 years
  • Commenting on the euro area economy, the president of European Central Bank said “deflationary forces have been replaced by reflationary ones”
  • The FT reports that central Europe is seeing a wave of wage demands that reflect strong growth and tight labour markets
  • In response to rising wage pressures, Poland has issued nearly 1.3m six-month work permits last year to Ukrainian migrants, while Czech exporters have asked their government to loosen visa policies to attract foreign workers
  • The IMF cut its 2017 US growth forecasts from 2.3% to 2.1%, citing the Trump administration’s challenges in passing policy through Congress
  • In comments seemingly aimed at the Trump administration, German Chancellor Angela Merkel claimed “whoever thinks that the problems of the world can be solved by protectionism and isolation lives under a huge misconception”
  • The US Federal Reserve cleared big US banks to pay out almost all their earnings to shareholders after they passed the latest round of stress tests
  • The European Commission issued Google with a record €2.4bn anti-trust fine, accusing the search engine giant of illegally favouring its shopping service
  • The Bank of England told the UK’s major lenders they must set aside a combined £11.4bn as protection from risks of an economic downturn
  • The Bank’s annual stress tests will be brought forward to September to assess whether lenders have enough capital
  • The National Audit Office warned police and industry are underprepared for online fraud, which is now the most commonly experienced crime in England and Wales
  • The FT reports that Japanese companies are experiencing challenges with filling vacancies due to an ageing and shrinking workforce, as the ratio of vacancies to applicants in Japan hit a 43-year high in May
  • The number of students from disadvantaged families dropping out of universities in their first year has reached a five year high in England
  • A quarter of UK parents regret not saving earlier for their child’s education and one-in-five wish they had saved more, according to HSBC

Brexit and European politics

  • Brussels outlined options, including common energy or environment taxes, to plug a projected €20bn annual gap in the EU budget after the UK’s exit
  • Official estimates on the immediate economic impact Brexit were misleading and “overly pessimistic,” according to a study published by Policy Exchange
  • The Japanese government is hoping to start informal free trade talks with the UK before its exit from the EU, according to the Nikkei business newspaper
  • The EU’s chief Brexit negotiator, Michel Barnier, called for “more ambition, clarity and guarantees” from the British government on the post-Brexit rights of EU citizens
  • Irish authorities claim more than a dozen London-based banks have agreed to move some operations to Dublin in anticipation of Brexit
  • Italy saw a surge in the number of migrants arriving by boat on its coast, with last year’s record of 181,000 migrants now likely to be exceeded this year
  • Announcing plans to curb migrant arrivals, former Italian Prime Minister Matteo Renzi said “The numbers are not sustainable, we have to acknowledge that public opinion is exasperated”
  • The Italian government provided nearly €17bn in state aid to wind up two failing banks, Veneto Banca and Banca Popolare di Vicenza
  • The FT reports that Germany is pressing Brussels to tighten its rules on bank bail-outs, as the two Italian lenders were dealt with in a way that side-stepped EU laws which would ensure senior bank creditors take losses
  • France’s public spending watchdog warned the government was on course for a deficit of 3.2% in 2017, which would breach the EU’s 3% limit

And finally…

  • An 80-year-old woman delayed a flight to Shanghai after throwing coins into the plane engine as she prayed for safety and good luck, superstitiously believing it would bring good luck – on a wing and a prayer

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