Weekly economic briefing: A lesson in international education and economic growth

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.

A lesson in international education and economic growth

Recent figures from the Department of Education show that, for the first time, Australia’s international student enrolments rose to close to 800,000 in 2017, and has continued to grow strongly through the first two months of 2018. Growth in education exports – and service exports more broadly – has been underpinned by a lower $A in recent years, and has been an important part of Australia’s economic re-balancing after the end of the mining investment boom. In recent years, international education has become one of Australia’s most important exports, attracting students from over 170 countries and providing more than $32 billion in direct revenue from education-related travel in 2017.

China, as well as being Australia’s largest buyer of iron ore, is also our largest buyer of education exports, with almost 30% of international students in 2017. And while the number of Chinese students studying in Australia already dwarfs any other source country, the number of students continues to grow rapidly. Chinese student enrolments rose by a very strong 18% in 2017, and by a whopping 36% since 2015 (see chart).

South and south-east Asia are also important source countries for Australian education exports. There was rapid growth in student enrolments over 2017 coming from Nepal (up 56%) and Sri Lanka (up 32%). Encouragingly, arrivals from India (up 12%) continue to improve, rebounding from negative publicity around security for Indian students in 2009 that saw arrivals plummet. Outside Asia, enrolments from Brazil rose a very strong 24% and from Colombia by 26%.

Chart 1: Annual international enrolments, 2015-2017

Source: Department of Education

New South Wales and Victoria remain the big draw cards for international students, taking up 37% and 33% of international enrolments in the first two months of 2018, respectively. These enrolments have helped bolster the population growth seen by both states over the last 18 months. Meanwhile, growth in international enrolments into Tasmania (up 37% in 2017) and ACT (up 17% in 2017) shows the strengthening of the sector across the east coast.

The rapid influx of international student numbers has seen international education rise to Australia’s third-largest export, behind only iron ore ($63 billion) and coal ($57 billion) and ahead of natural gas ($26 billion).

And with a service-focused economic transition underway in Australia, the role of international education is important. While the economic benefits of goods exports generally finish when they leave our shores, service exports (including tourism) are much more kind. Students contribute not only their tuition fees but their spending on accommodation, food and domestic travel while they’re here. Not to mention the ongoing tax receipts and addition of skilled workers from those who stay in Australia to work after their studies conclude.

But the rapid pace of growth in education exports may not be sustainable. The $A has stabilised after falling from above parity with the $US at the height of the mining boom, so the competitiveness of Australian institutions is no longer improving. That said, China’s middle class continues to grow; and given its sheer scale, there is still lots of room for demand from China to increase.

Yet that reliance on China could be a double-edged sword. Indeed, a common thread across all three of Australia’s largest exports is the importance of China: of our coal exports in 2016-17, nearly one-fifth went to China, while we shipped a whopping 83% of our iron ore exports there.

This in itself is not a problem. In fact, it’s largely this very reason that Australia has managed to navigate falling into recession over the last decade. But it does create some concentration of risk. And with so many uncertainties surrounding the Chinese economy – a huge debt overhang, the prospect of trade wars with the US, and rising Australia–China diplomatic tensions – there are a range of scenarios where Australia’s education exports to China could cool off.

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. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/

As good as it gets

  • The global recovery has moved up a gear in the last year. The year 2018 is likely to be the best year for world growth in seven years. But this is a mature recovery and, at the risk of sounding like a kill joy, this is about the time you’d expect the economic cycle to start rolling over. For the rich western economies the second half of 2018 is likely to mark the peak in growth.
  • The US and UK economies have been growing for more than eight and half years. By the end of this month this will become the second longest American recovery in 150 years. Post war recoveries in the UK have, on average, run far longer than US recoveries, but this one is the third longest recovery since the War.
  • This may be an old recovery but, for Americans and Brits, it has failed to deliver the growth seen in previous upswings. For both countries this has been the weakest recovery since the War and growth in disposable incomes has been similarly lacklustre.
  • The story in the euro area is different. Its recovery is younger and, especially in the North, has delivered better income growth than in Britain or the US.  The euro area upswing is likely to end up as the strongest since before the financial crisis.
  •  Yet in the last month or so we’ve seen signs that the pace of growth is moving towards a peak. Michael Penn, Chief Economist at Cohen and Steers in New York, has picked up a softening of the upward momentum in global economic activity. Industrial output data have been lacklustre across the world. The change has been most marked in the euro area which has seen a string of disappointing economic activity releases in the last month. One of Europe’s most widely watched indicators, the German Ifo survey of business sentiment, has unexpectedly edged lower from January’s all-time peak. It looks like the pace of growth took a knock in the first quarter of this year in both the euro area and the UK.
  • This isn’t dramatic stuff and the economic outlook remains positive. Indeed last week the International Monetary Fund raised its global growth forecasts. Any drag on activity from severe weather and the flu outbreak in the first quarter should pass. It is possible that jitters about trade wars could prove transient.
  • But something else is going on. Markets and companies are having to contemplate a rolling back of the ultra-cheap money policies of the last 10 years. The Federal Reserve is expected to raise US rates by 100 basis points (bp) by the end of 2019, taking US interest rates to around 2.75%, the highest level since March 2008. Mark Carney, governor of the Bank of England, has dampened expectations of any sharp upward move on UK rates in recent days, but markets still expect the Bank to hike rates by 25bp in May. Economists expect the European Central Bank to end its programme of money-printing, or quantitative easing, in the second half of this year.
  • The steady rise in interest rates, or yields, on government debt since last summer shows that financial markets are factoring higher interest rates. Central banks want to ensure that, when it comes, monetary tightening is gradual and well signalled. They want to start the process of normalising monetary policy without derailing growth.
  • So the most likely outcome is that global growth next year will ease back only modestly. Still, the current run of softer data, the headwinds from trade jitters and the prospect of higher interest rates, are a timely reminder that recoveries do not last for ever.

 

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 1.4% at 7,368.

International economic briefing by Ian Stewart

Economics and business

  • Wages in the UK rose 2.8% in the three months to February, their fastest increase since 2015
  • UK annual inflation fell to 2.5% in March, the lowest rate in a year
  • The International Monetary Fund (IMF) upgraded its UK growth forecast for 2018 to 1.6%, citing stronger global growth but highlighted the threat of protectionism
  • Bank of England Governor Mark Carney said that an interest rate rise is “likely” this year, but any increases will be gradual
  • Consumer spending in the UK fell in the first quarter of 2018 by the largest amount in six years, according to Visa
  • Lloyds Banking Group is to cut 305 jobs as part of its plan to close 49 branches in the UK, in response to fewer in-branch transactions
  • Companies from Silicon Valley invested a record £1.1bn in UK technology start-ups last year, The Times reports
  • Turkey President Erdogan called a snap general election for June, bringing forward the vote initially scheduled for November 2019
  • London house prices fell by 1% in February, the first annual fall in almost ten years
  • Spaniards are now richer than Italians, according to new IMF data on per-capita gross domestic product
  • Carmaker Nissan is to cut hundreds of jobs at its Sunderland production plant as diesel car sales decline, following a similar move by Jaguar Land Rover, which last week said it would cut 1,000 contractors
  • The World Bank is proposing wide-ranging deregulation of labour markets which it says is necessary to tackle the changing nature of work, the Guardian reports
  • Starbucks is to shut 8,000 US stores for an afternoon in May for ‘racial-bias’ training
  • The UK is to propose legislation in May for companies to publish the ratio of chief executive pay compared to the average worker’s salary

Brexit and European politics

  • Britain’s House of Lords voted for the government to create a new customs union with the EU after Brexit
  • The German Chancellor Angela Merkel backed making the European Stability Mechanism, the euro area’s financial rescue fund, into a regional version of the IMF
  • The European Commission recommended that the European Council starts talks with Albania and Macedonia on their accession to the EU
  • The European Commission issued 40 proposals, to amend laws and give special powers to regulators, to enable the EU to cope with a no-deal Brexit scenario
  • The UK asked the Supreme Court to rule on the constitutionality of emergency laws passed by the Scottish and Welsh parliaments, which cut across the UK’s own EU withdrawal bill
  • The UK’s National Audit Office questioned the Treasury’s €40-45bn estimate of the Brexit financial settlement to the EU
  • Politico reports that the Chinese ambassador to the EU said that there would be no trade talks with the UK in the absence of a Brexit deal

And finally…

A report by Deloitte’s Sports Business Group found that Premier League footballers collectively took home £2.5bn in wages last season, up 9% from the previous year – a league of their own


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