Weekly economic briefing: Are the rivers of gold back?

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.

Are the rivers of gold back?

The decision by Treasurer Scott Morrison to reverse the Medicare levy increase by 0.5 percentage points from 1 July next year took many by surprise.

Making the announcement, the Treasurer noted that:

“Our economy is now stronger and it is continuing to strengthen…That is why we are now in a position to give our guarantee to Australians living with a disability and their families and carers that all planned expenditure on the NDIS will be able to be met in this year’s Budget and beyond without any longer having to increase the Medicare levy.”1

As the latest edition of Deloitte Access Economics’ Budget Monitor details, the global and domestic economy are doing the Budget plenty of favours. The Budget is benefiting from the best (and most synchronised) global growth in years, which is showing up in jobs, in profits, and in markets in Australia. And not only are there more dollars in the economy than Treasury forecast, but companies and super funds have also increasingly run out of the losses they racked up during the GFC – meaning that good news on the economy is being turbocharged in terms of its effects on the tax take.

Overall, Deloitte Access Economics estimates that nominal GDP (a proxy for national income) will rise $73 billion this year, yet Federal revenues will rise $41 billion. Effectively, the marginal tax rate for the nation as a whole this year will be 56 cents in the dollar, as the average tax rate on all corporate income has shifted up. As the chart below shows, that’s by far the highest amount since the late 1990s (excluding the accounting tricks of 2012 13).

Chart 1: Share of national income growth captured by the Commonwealth

Source: Deloitte Access Economics

This good news on the tax take means that Deloitte Access Economics expects the deficit to be $16.6 billion this financial year and a smaller $13.3 billion in 2018-19, around $7 billion better in both years than what Treasury expected in its mid-year Budget update last December.

However, today’s good news may not last. For starters, some of it is likely only temporary. The better global growth is now, the harder it’ll be to maintain the momentum as global capacity tightens and interest rates rise. The same goes for the out performance of the tax system – an earlier end to the impact of tax losses and a stronger than expected lift in capital gains taxes are both essentially timing shifts.

Adding to this is Treasury’s baked-in optimism when it comes to wage growth, which is far from guaranteed. Our view is that, while wage growth will improve, it is unlikely to reach the heights projected by Treasury. We see these factors – particularly lower wage growth and the removal of the Medicare levy increase – making the Budget balance around $6 billion worse across both 2019-20 and 2020-21 than Treasury expected in December. Encouragingly, this still sees a small surplus of around $3.8 billion in 2020-21.

So the key caveat says the figures above, while very welcome, are also artificially good: and they don’t account for what is likely to be the centrepiece of the coming Budget (and the duel that will dominate the next Federal election) – promises of personal income tax cuts.

1 http://sjm.ministers.treasury.gov.au/speech/006-2018/

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


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/

Thoughts on the global economy

  • Last month Deloitte’s economists from across the world met in London to assess the outlook for the global economy. It was a fascinating and wide-ranging discussion. Rather than trying to summarise individual views, here are some of the areas where the discussions affected my own thinking.
  • First, the US growth outlook for this year is bright, thanks in part to the boost from tax cuts. However, I came away from our meeting thinking that the US is quite likely to hit a recession in or before 2020, as the effect of higher interest rates kick in and the impact of tax cuts lapse. Fortunately the risks of recession in the rest of the world currently seem lower than in the US.
  • Second, interest rates will provide valuable signals about the risk of a US recession. The yield curve, the gap between short-term and long-term interest rates, gauges the tightness of monetary policy. As central banks raise interest rates, the gap narrows and, in the jargon, the curve flattens. The US yield curve has flattened significantly, with the gap between short and long term rates falling to just 70 basis points (bps) last week, pointing to tighter monetary policy. We’ll be watching that gap; every post-war US recession has been preceded by short-term rates moving above long-term rates, a so-called inverted yield curve.
  • Third, China is moving to a new, slower growth path. In the 34 years up to 2016 Chinese growth averaged a staggering 10% a year and never dropped below around 4% (in a good year the US might post growth of 3.0%). The phenomenon of a vast, populous country growing for over three decades at such a rapid rate is without parallel in history. But a maturing economy and a shrinking workforce is slowing Chinese growth. In the long term, growth of 3-4% may well become the norm. The global economy will have to get used to slower Chinese growth.
  • Fourth, the German economy is, in the words of my colleague Alexander Borsch, “having the time of its life”. German growth this year, around the 2.5% mark, will be twice its trend or sustainable rate. The German economy is certainly running ‘hot’. Alex told us that house prices have become a staple of dinner party conversations in Germany in much the way they are in the UK and the rest of the Anglophone world. Since 2008 German house prices have risen 50%. Over the same period, which included big falls, UK house prices have risen by 16%, US prices by 15%. Rising house prices and the appreciation of the euro against sterling means that a UK investor who bought German property ten years ago would have seen a 79% gain.
  • Despite discussion of recession risks I was struck by a cautious optimism about the long-term outlook. There was a general view that the slowdown in productivity growth in the West has been overstated, partly because of problems in capturing gains from technological change and quality improvements. As a result most of us felt that Western economies should be able to improve upon the lacklustre growth rates seen in the last ten years.
  • We agreed too that apocalyptic media stories about new technologies destroying work were overcooked; technology would continue to create more jobs than it destroys. The challenge would be to provide people with the right skills to prosper. The question was, what skills? We had a show of hands on what we would recommend as the ideal degree subjects for an 18-year-old planning for a 40-year career. Two-thirds advocated STEM subjects, so science, technology, engineering and maths. A third, myself included, opted for humanities/liberal arts as a way of honing skills of expression, creativity and thinking.
  • Happily we concluded with a consensus and perhaps a case of “have the cake and eat it too“ thinking. We agreed that the ideal degree would combine STEM and humanities.

PS: Over the last week we’ve seen more evidences of a softening in global growth in the first quarter. US growth moderated slightly and the UK grew by just 0.1% in Q1, the weakest reading in six years. The German Ifo survey of business sentiment, one of Europe’s most important indicators, fell for a third consecutive month. The European Central Bank left monetary policy unchanged and its president, Mario Draghi, said the region’s recovery had lost momentum. The euro fell to a three-month low against the dollar on the news.

PPS: The Financial Times featured a letter from Dr Lawrence Haar, Associate Professor at the University of Lincoln, arguing that poor UK productivity growth reflected the UK’s low unemployment rate. Dr Haar wrote that low unemployment means almost everyone, including less productive workers, find jobs whereas high unemployment means that only the most productive find work. This may partly explain the UK’s poor productivity record. However, it does not have to be this way. Some economies, including Singapore, Switzerland and Germany, combine low unemployment and decent productivity growth. The right training and education can raise productivity rates for lower skilled workers.



The FTSE 100 ended the week up 1.8% at 7,502.

International economic briefing by Ian Stewart

Economics and business

  • The UK economy grew at just 0.1% in the first quarter of the year, well below expectations and its slowest pace since 2012
  • The UK recorded its first current budget surplus in 16 years, for the 2017/18 fiscal year
  • The US 10-year Treasury yield rose above 3%, for the first time in more than four years
  • North Korean leader Kim Jong-un met his South Korean counterpart Moon Jae-in and agreed to a “complete denuclearisation” of the peninsula
  • The UK car production fell 13% year-on-year in March, amid concerns over falling diesel sales and the impact of Brexit on exports
  • The European Commission released a draft proposal to tackle ‘fake news’ calling for tech giants to sign up to a voluntary “code of conduct”
  • In response to the EU’s new regulations on managing data, WhatsApp increased the minimum age for users in Europe to 16 and Snapchat said it would stop retaining location data on under-16s
  • The number of UK residential property transactions fell sharply between February and March this year
  • Apple will start paying off a record €13bn back tax bill to the Irish government in May, 19 months after Brussels ruled that the tech giant had received 25 years of illegal aid from Dublin through a tax scheme unavailable to other firms
  • UK discount retailer Poundworld is finalising plans to close nearly a quarter of its 355 stores
  • US GDP slowed to 2.3% in the first quarter on an annualized basis, down from 2.9% the previous quarter, as consumer spending moderated
  • Sainsbury’s, the UK’s second-largest food retailer, and Walmart’s subsidiary Asda are close to a £15bn merger, the FT reports

Brexit and European politics

  • Theresa May, the UK’s prime minister, rejected calls to hold a confidence vote on the UK’s position on leaving the EU’s customs union
  • David Davis, the UK’s Brexit secretary, said Theresa May could be forced to seek a better EU exit deal if MPs reject the original offer
  • The EU’s top financial services official warned that the UK’s financial trading opportunities after Brexit will depend on its adherence to EU rules
  • The UK will have to pay the Brexit “divorce bill” even if no deal is reached on future EU trade arrangements, according to the UK’s National Audit Office
  • The European Commission is proposing to raise its cap on the EU’s budget to give more scope for the bloc to underwrite cheap loans to member states hit by future economic shocks, the FT reports
  • Rolls-Royce will relocate the safety certification process of British-made airliner engines to the EU to avoid any issues arising in the event of a cliff-edge Brexit
  • The UK has ratified an EU initiative that will enforce “unitary patents” across euro area, allowing inventors to defend IP rights with a single registration
  • The UK is considering plans to launch its own satellite-navigation system to rival the EU’s Galileo project following the European Commission’s warning that UK firms may be frozen out of the project after Brexit due to security concerns

And finally…

  • An angler from Bournemouth who almost choked to death when a fish he was trying to kiss literally jumped down his throat has refused to agree not to kiss more fish in the future – sole-mate

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