Weekly Economic Briefing: The Year Ahead

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.
The year ahead: 2019

What might 2019 hold for the Australian economy?

Deloitte Access Economics’ central forecast for Australia in 2019 is for fairly strong economic growth of over 3%, though a touch lower than the nearly 3.5% we estimate for 2018. Jobs growth may slow to a more sustainable pace, the unemployment rate will remain low and wage growth will edge up but remain modest. All this adds up to a solid year for the economy.

This strong Australian growth is against a backdrop of a solid global economy. Global growth in both 2017 and 2018 has been fairly strong, with the large rich economies finally getting back on their feet a decade after the Global Financial Crisis. Yet the world economy’s best days for this economic cycle are probably over – global growth will slow next year, and will slow even further in 2020 as the supercharged US economy runs out of puff.

This is our view of the ‘most likely’ outcome. But things could turn out quite differently depending on whether risks – either positive or negative – materialise.

For the global economy, most risks are negative, and indeed it’s hard to think of many positive ones at this point. A full-blown trade war between the world’s two biggest economies remains a significant risk. We pointed out after the G20 trade agreement between Presidents Trump and Xi that the US­–China truce on trade looked shaky. Since then, it’s looking shakier still, with diplomatic ties strained by the arrest and possible extradition to the US of a senior Huawei executive in Canada. And it’s not just world trade but also world business investment that could suffer (indeed may already be suffering) from a trade war.

In Europe, only three months out from the 29 March 2019 Brexit date, we still don’t know, remarkably, whether Britain will leave the European Union with a deal or without a deal – or indeed not leave at all. The outcome could matter not just for the UK, but for business and financial market sentiment more broadly.

Meanwhile, the US Federal Reserve will likely continue to gradually raise interest rates in 2019, putting downward pressure on currencies in emerging markets, including China. Will that lead to further Chinese tightening of capital outflows that reduce Chinese investment in Australia? Do the crises of Argentina and Turkey in 2018 presage what’s ahead for other emerging markets in 2019?

Here in Australia, the main risks to the economy are from population policy, consumer spending, and housing, all of which are related. Population has become a thorny political issue, particularly in Sydney and Melbourne where congestion has crossed the community’s pain threshold. Federally, the government is considering lowering the permanent migration cap, although it’s not yet clear whether that lower cap – depending on what cap is finally decided – would be lower than current migration levels and therefore a binding constraint. If the final revised cap does bite, it would slow Australia’s economic growth in a way that would be felt across most sectors of the economy.

It would also reduce growth in demand for housing. House price falls in Sydney and Melbourne have been orderly so far, in that the damage hasn’t extended far beyond the housing sector. But while prices continue to decline, consumers will become more hesitant to open their wallets until they see their wages rise more quickly (an issue we discussed last week). It will also make property developers – and their financiers – more cautious. It’s mainly for this reason that we expect housing construction activity to fall in 2019. A sharper housing market downturn, though, could result in a bigger crunch on consumer spending and construction activity.

These risks mean that the key things to watch in 2019 will be wages growth, signs of any turnaround (or accelerating decline) in the housing market and, crucially, where we land on population policy.

There is potential for positive surprises though, too, especially for higher public spending to boost activity in the short term. The Victorian government has doubled its debt target (from 6% to 12% of gross state product) in order to fund more infrastructure spending. The upcoming election in NSW could see broadly similar results, with that State’s existing huge infrastructure program still only catching up to past population growth. And the Federal election, likely to be held in May, will be fought with parties having bigger war chests than they have had for a number of years.

 

This is our final Weekly Economic Briefing until 15 January 2019. Wishing you a safe and happy holiday season

 

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

 

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/

  • Here is a choice selection of the “and finally” news stories from the Monday Briefing in 2018. The Monday Briefing is taking a break until Monday 14th January. In the meantime the Deloitte economics team – Ian, Debo and Tom – wish you a merry Christmas and a happy New Year.
  • Archaeologists in northern Israel have discovered what they believe to be the world’s oldest site for alcohol production – a cave where the hunter-gatherer Natufian people are believed to have made a beer-like beverage some 13,000 years ago – pale-aleontology.
  • Japanese opposition lawmakers accused the minister for cyber security Yoshitaka Sakurada of making a mockery of his new role after he admitted to never having used a computer – artificial intelligence.
  • The English Football Association has been fined £50,000 because England players wore unauthorised socks during the ill-fated World Cup game against Croatia. Dele Alli, Eric Dier and Raheem Sterling wore special cushioned socks over their official kit to aid ankle support – sole-destroying.
  • America’s cheese stockpile hit an all-time high of 1.69bn pounds due to a fall in demand and a surplus of milk which has a longer shelf life when made into cheese – quantitative cheesing.
  • Bulgaria agreed to spare the life of Penka the cow after plans to kill her for crossing European Union borders without paperwork triggered an international outcry – free movement.
  • A group of UK school children sent a Bakewell pudding into the stratosphere using a high-altitude balloon. Tracking devices attached to the delicacy, which record its position, temperature and take photographs, showed it had last reached an altitude of 16,000m – space jam.
  • Wildlife officials in India’s western state of Maharashtra have bought bottles of the men’s perfume ‘Obsession’ by Calvin Klein to try and catch a tiger which has killed 13 people. The authorities hope the fragrance, which contains a pheromone derived from a cat-like mammal, can lure the tiger in which has evaded capture for two years – fatal attraction.

 

Our Review of Last Weeks News

The UK FTSE 100 equity index ended the week up 0.8%. However, the trend in the index since May has been down and at last Friday’s close it was only marginally above the 2 year low reached on 6th December.

 

Economics and business

  • UK wage growth accelerated to 3.3% in the three months to October on the same period a year ago, the fastest pace since 2008
  • The number of people in work in the UK rose to 32.48 million, the highest level since records began in 1971
  • The value fashion chain Bonmarché warned conditions on the UK high street are “unprecedented” and far worse than during the financial crisis
  • The European Central Bank (ECB) confirmed it will halt its €2.4 trillion crisis-era quantitative easing program this month
  • ECB president Mario Draghi said he expects slower growth in the euro area due to “geopolitics, protectionism, vulnerabilities in emerging markets and financial market volatility”
  • Euro area investor confidence fell to a four-year low in December
  • French business activity contracted for the first time in two and a half years and in Germany private sector activity slowed to a four-year low
  • Italian bonds rallied after the country’s government agreed to demands from Brussels to lower its projected budget deficit for 2019
  • The European Parliament signed off on the EU’s largest ever trade deal. The agreement with Japan creates an “open trade zone” for 630 million people and will come into force early next year
  • The FT reports that demand for new corporate paper has plummeted as investors become increasingly risk averse
  • The World Economic Forum will allow Russian businessmen who had been sanctioned by the US to attend the annual Davos meeting next month after Russia threatened to boycott the gathering
  • Germany is tightening regulations to make it harder for non-European companies to own stakes in German firms in response to China’s drive to acquire new technologies and intellectual property
  • China announced it would lower tariffs on automobiles imported from the US from 40% to 15%, the same level it levies on other countries
  • The head of the International Crisis Group Companies, a non-governmental grouping dedicated to resolving conflicts, warned companies of the risks of sending employees to China following the arrest and detention of a Canadian member of its staff
  • The World Trade Organisation and the United Nations warned of the severe threat to the global economy from the trade war between the US and China
  • US employers are having to raise wage rates in response to very low US unemployment
  • Chinese export growth slowed sharply in November
  • Adventure camera manufacturer GoPro is shifting production out of China to avoid tariffs on US-bound exports
  • India’s central bank governor Urjit Patel resigned following tension with prime minister Modi over the independence of the central bank
  • The International Energy Agency said that oil suppliers had coordinated output cuts to set a floor of $60 for a barrel of crude oil
  • JLR, the UK’s largest carmaker announced thousands of jobs cuts in response to poor Chinese sales, the impact of the switch away from diesel and Brexit effects

 

Brexit and European politics

  • UK prime minister Theresa May deferred parliament’s “meaningful vote” on her Brexit deal to seek “further assurances” from EU leaders on the Irish backstop
  • Downing street said the vote will now take place by the 21st of January, but not before Christmas
  • French president Emanuel Macron said the UK’s Brexit deal was non-negotiable and further talks could not go beyond a “political discussion”
  • UK prime minister Theresa May survived a vote of no confidence from Conservative MPs, winning 63% of the vote
  • Former Brexit secretary Dominic Raab said it is “very difficult to see” how Theresa May can continue as prime minister with the scale of opposition to her deal
  • Theresa May told Conservative MPs she would not lead the party into the next general election
  • UK trade secretary Liam Fox backed calls to offer MPs a free vote on how to end the Brexit impasse after EU leaders rejected Theresa May’s appeal to amend her withdrawal agreement

 

And finally…  Two nuns have admitted embezzling $500,000 from a school they were working at in Torrance, California and spending the money in Las Vegas casinos – bad habits.


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