Weekly economic briefing: Business Outlook – the clouds continue to clear

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

 

The latest release of Deloitte Access Economics’ Business Outlook reports that the global economy remains robust, with growth in both 2017 and 2018 looking to be the best since 2012. And this is particularly good news given that the joy is widely spread across much of the world: each of China, Europe and Japan is outperforming expectations.

This is despite a bunch of risks that have threatened to rain on the global prosperity parade: renewed protectionism, pressures on the Eurozone, North Korea’s accelerating missile program, Chinese debt and stretched asset prices have all risked being a headwind to global growth. Fortunately, these headwinds have done little to derail the better news on global growth so far in 2017.

And this is true at home as well, with the clouds that loomed above Australia’s fortunes beginning to clear. When China began to slow six years ago, a fast shockwave was sent though national income as commodity prices fell, and a slow shockwave through production growth (mine approvals came to a halt a long time ago, but it wasn’t until this year that the already approved projects were completed).

But now those two big negatives are mostly in the rear view mirror. And going forward, the most likely path for Australia sees both national income and national production growth gradually returning to a steadier path – boosting wage growth as they do so, albeit slowly.

This puts Australian job growth in good stead as well. And it looks set to stay that way for a while longer, as good global growth lifts the demand for both labour and capital, thereby boosting the outlook for both jobs and business investment.

Looking at the states, the healthy world economy is providing a happy backdrop right across Australia. For the mining states, China’s never-say-die construction sector has showered blessings on Western Australia, Queensland and the Northern Territory.

Meanwhile, strong migration – from overseas and interstate – are boosting pretty much all activity indicators in the south east of the country, particularly for Victoria. Even Tasmania and South Australia are doing better than perhaps many realise, meaning most of Australia is sharing in the solid growth and improving prospects of the moment.

But there are now new risks facing Australia. Part of today’s good news is thanks to renewed stimulus that has been boosting Chinese construction activity, and that is likely to ease back in coming years. Looking longer term, like many of our trading partners (such as Hong Kong, Korea, Taiwan, Singapore, Thailand and China), Australia will age relatively rapidly. However, provided we continue to welcome migrants to our shores, our growth and living standards will take a rather smaller hit than is expected in many of our major trading partners.

 

For more information on the Australian brief, please contact David Rumbens.

 

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/

  • The Monday Briefing reached its tenth birthday over the summer. This week’s Briefing offers some thoughts on the lessons we’ve learned and the errors and successes we’ve made along the way.
  • Perhaps the most obvious lesson is that the economy depends on a stable financial system. In getting this right before the crisis, and emphasising it in the Briefing, I can’t claim great prescience. The devastating effect of the bursting of Japan’s banking and asset bubble in the early 1990s provided me, and others of my generation, with a graphic illustration of the effects of a financial collapse.
  • Following the failure of Lehman Brothers in 2008 it became clear that a very nasty recession was on the cards. The question was whether the world could avoid a 1930s-style depression. The briefing took issue with those who argued that the global economy would drop off a cliff. As we wrote in March 2009, “at an extreme, Quantitative Easing should work. A central bank could pay any price and buy all assets in the economy. It could shower consumers with helicopter drops of cash. At some point a rising tide of money and liquidity would kick start growth”.
  • This simple logic made us think that, bad though the recession of 2008-09 was, it wouldn’t turn into a depression. For the same reason we did not think the euro crisis would morph into an unstoppable depressionary spiral.
  • We were right on those two counts, but wrong on plenty of others. In the last ten years I’ve re-learned the impossibility of predicting movements in asset prices. Apparently over-valued assets go on getting more overvalued. Cheap assets get cheaper.
  • Bonds are a great example. In 2010, I felt that bond yields, or interest rates, having fallen sharply, were unsustainably low. I wrote, “the fundamentals do not look good for government bonds even in the US and UK. They are issuing debt on a vast scale. Inflation and growth expectations are rising, a negative for bonds which give a fixed return”. That was all true. What we did not anticipate was the choppiness of the recovery or just how long low interest rates would last. As a result bond yields, far from rising, have fallen, and their value has soared.
  • We were too bearish too early on gold. Its price rose four fold in the ten years to 2009. In that year we concluded that the three main drivers of gold were the weak dollar, demand as a hedge against inflation and emerging market demand for jewellery. The briefing ended with “as for the future direction of the gold price we haven’t a clue… these three forces could keep pushing gold up for a long time to come. That said, gold today seems about as fashionable an investment as tech stocks were in 1999 or US housing was in 2006 – a slightly sobering thought”. In fact the gold price rose for a further 2 years.
  • One of the surprises of the West’s recovery is that wage growth has remained muted despite falling unemployment. The normal relationship between the supply of, and demand for, labour, seems to have broken down. The briefing got that wrong. At the start of this year, with UK unemployment heading to a 40-year low, we thought wage growth would accelerate. Instead it has flat lined. I take comfort from being in the company of most economists with that error.
  • One thing that has stuck in my mind from the last ten years is the frequent divergence between the mood about the economy, often represented in newspaper headlines or equity indices, and the economic fundamentals. The mood oscillates, often wildly, fundamentals change slowly.
  • 18 months ago the mood about the global economy was gloomy with a focus on Brexit, the US elections, a possible Chinese crash and the rise of right wing parties in Europe. That nervous zeitgeist was not a good guide to subsequent events. In the last year and a half the global recovery has gathered pace and financial markets have boomed. If predicting growth was the aim it would have been better to focus on the fundamentals last spring, above all cheap money, and pay less attention to the news.
  • In forming views we often place too much weight on the latest information, particularly when illustrated by graphic examples. These mistakes are sufficiently well documented to have names. Behavioural economists call the tendency to form views based on the latest news the recency bias. The availability heuristic describes the way in which we attach greater weight to something which can be readily recalled.
  • Less easily recalled information, in this case economic basics – such as the degree of monetary stimulus or where we are in the economic cycle – too often get neglected.
  • One antidote to short termism is an understanding of economic history. For all the talk in recent years of the ‘unprecedented’ or ‘unique’ nature of events much of what has happened is eerily familiar. History sheds light on most of today’s big economic arguments, from the debate about globalisation, to the size of the state to the benefits and risks of loose monetary policy.
  • When I started the Monday Briefing in the summer of 2007 the focus was on how rising asset prices and debt levels were creating new risks. It was a classic case of low interest rates driving a search for yield and, in turn, financial excess.
  • Central banks responded to the crisis by printing money and collapsing interest rates. At the time, in early 2009, we wrote in the briefing, “The greater risks lie further ahead once Quantitative Easing has achieved its original goal and the economy is growing. The risk is that QE ends up overshooting, pushing up inflation and asset prices higher sowing the seeds of the next bubble”.
  • Eight years on we seem to be moving into this stage of the cycle, with decent global growth, heady asset prices and rising debt levels. The challenge for central banks, and we are in the realms of experimental policy here, is to reduce monetary stimulus without crashing asset markets or economies.
  • This scorecard of successes and failures is subjective, somewhat akin to marking our own homework. You can make your own judgement by visiting the last few years’ worth of briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

PS – Many of you, around 1,200 readers, kindly contributed to our survey of Monday Briefing users over the summer.  Feedback was generally positive. Using a TripAdvisor or Amazon style rating system, the overall rating was 4.7 stars out of 5. If the briefing were a London restaurant we’d be on the same level as Gordon Ramsay’s Petrus in Knightsbridge. Three quarters of subscribers read the Briefing every week, giving a weekly readership of around 25,000. Most of you read the Briefing on a laptop or desktop, not a mobile. The average subscriber is aged 39 and has been with us for 3 years. The favourite news sources for our readers are the BBC (84% of readers use it), the Financial Times (55%), the Economist (44%) and the Guardian (34%). Many thanks for your comments, ideas and feedback. The team has read them all, we’ve discussed them in detail and we plan to act on many of them.

PPS – Earlier this month I interviewed the US poll guru, Dr Frank Luntz, a man described by Sir David Frost as the “Nostradamus of pollsters”. He’s a fascinating and knowledgeable chap. You can hear Frank’s thoughts on Donald Trump, Brexit and European politics in our interview: https://www2.deloitte.com/uk/en/pages/global-markets/articles/interviews-with-dr-frank-luntz.html

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 0.2%, at 7,523.

UK inflation hit 3% in September, a five-year high, increasing markets’ conviction that the Bank of England will raise interest rates in November for the first time in over ten years.

 

International economic briefing by Ian Stewart

Economics and business

  • UK wage growth slowed and remains well below inflation
  • European Central Bank President, Mario Draghi, said there is a “window of opportunity” for euro area structural reform while monetary policy is loose
  • The ECB vice president, Vítor Constâncio, said that regulators need to get tough on non-bank lending to reduce financial risks
  • Spain trimmed its growth forecasts, citing disruption from the political crisis in Catalonia
  • Chinese central bank governor, Zhou Xiaochaun, warned against complacency around the risks from excessive debt and speculative investment
  • The Chinese President said China would no longer shy away from world leadership, a sea change from the low profile policy of the past
  • A Financial Conduct Authority survey showed that half of UK consumers exhibit characteristics of “potential vulnerability” in their financial circumstances
  • Jacinda Ardern is to become New Zealand’s next Prime Minister, just two months after taking charge of the opposition Labour Party
  • George Soros, one of the most successful investors of all time, has given $18bn to his charitable foundation, Open Society

Brexit and European politics

  • Theresa May said there is a “clear and urgent” need to move Brexit talks to the next phase
  • EU leaders demanded a “firm and concrete commitment” from Theresa May to increase the initial €20bn divorce settlement offer
  • Donald Tusk gave the “green light” to preparations for the second phase of Brexit talks, which will deal with trade
  • An OECD report on the UK’s productivity problems emphasised the need for a post-Brexit transition agreement
  • The report also urged the UK to maintain the “closest possible” ties with the EU to limit the costs of Brexit
  • Goldman Sachs Chief, Lloyd Blankfein tweeted that he had enjoyed his recent trip to Frankfurt, “I’ll be spending a lot more time there. #Brexit”
  • Asian investment in London office space dominated the market in Q3, partly due to the attraction of a weaker pound
  • Brexit remains the top risk for UK CFOs, according to Deloitte’s latest CFO survey
  • The City of London has warned that financial companies will begin to move their activities elsewhere unless the UK can agree a post-Brexit transition period with the EU by the end of March 2018
  • CBI director-general, Carolyn Fairbairn, urged the chancellor to fast-track infrastructure projects and not let Brexit crowd out issues at home

And finally…

  • Police in Geneva are investigating after toilets in a bank and three restaurants were blocked with roughly $100,000 in high denomination euro banknotes – flush with cash

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