08 Feb Economic Update – February 2018
What a rollercoaster of a ride in the markets so far in February! This month Andrew Starke of Kaplan Professional speaks with Tim Harcourt, the Airport Economist from the University of New South Wales, about the global trends likely to have the biggest impact on Australia in 2018.
Most forecasts for the Australian economy in 2018 are cautiously optimistic, driven largely by improving global conditions but tempered by uncertainty around household consumption. What do you see as the key global themes?
It’s a real paradox isn’t it, in the sense that you have quite strong global conditions, particularly in Asia, and quite good Australian economic fundamentals and yet a lot of weakness at the household level, partly because of levels of household debt and partly because wage growth has been quite slow despite a strong labour market. So, in some ways our fundamentals are very good and in other ways, outside the main part of the corporate sector, there’s a fair bit of weakness.
I think it’s interesting, China has been moving from a nation of shippers to a nation of shoppers. They’ve had this incredible export-led growth, double-digit growth and so on, and they’ve now slowed it down. They’ve got more of a focus on domestic consumption and investment, so that means we’re not having the mining boom like we did.
We’re having the ‘dining boom’ in terms of demand for agricultural commodities. But we’re also seeing the growth of the second and third-tier cities — Qingdao, Chongqing, Chengdu — where you’ve seen massive investment in infrastructure, and that’s creating a different type of demand for Australia. Principally, the main engines for Australia are China, India, ASEAN and our traditional trading partners in Northeast Asia, Japan and Korea, with investment flows coming from the USA and Europe.
Growth in China has eased slightly from mid-2017, as measures to contain financial risk and improve the banking environment take effect. Where is the next area of growth for China, and what would the implications be for Australia?
China really does want to slow down its export dependence and it wants to boost its domestic consumption and investment. When you go to the second- and third-tier cities, you see incredible investment in new airports, new railways, new infrastructure and new civic buildings. That’s creating great demand for Australian architects, professional services firms, education as well as tourism.
So, I think it will be more a services- and Chinese-domestic-activity-driven boom much more than the traditional factory-of-the-world-type boom that we’ve seen in the past. That means you won’t get double-digit growth. China is keen to contain wage and price inflation, but you will see sustainable growth.
The Australia-Japan free trade deal signed by Shinzo Abe and Tony Abbott in 2014 boosted farm exports into Japan. What are we likely to see in terms of the main takeaways from Prime Minister Malcolm Turnbull’s January visit to Japan?
Malcolm Turnbull’s visit to Japan was principally about security and defence more than economics. The Economic Partnership Agreement has been successful. Japan has always been our traditional springboard into Asia. We signed a commercial agreement in 1957 that really gave Australia a beachhead in the Asia Pacific.
Japan hasn’t been as strong as China and India and ASEAN as a trading partner now. But it’s still very important in terms of mining, in terms of agriculture, in terms of LNG [liquefied natural gas] and partially in terms of technology and professional services.
I think the future for Japan and Australia will be principally around agricultural security, food security, energy security and also in professional services; whether it be financial services, whether it be professional services as Japan opens up its economy a bit more. There are still only a hundred Australian companies with offices in Japan, and that compares to about 3,000 in China. So, Japan is still pretty much a closed economy.
US tax cuts and the revision of trade deals have significant implications for Australia but, so far, the threat has been greater than the execution. Do you see this changing over the next 12 months?
Donald Trump picked up the anti-free trade sentiment in the American electorate very well. So did Bernie Sanders, and he pushed Hillary Clinton to change her position on the TPP [Trans-Pacific Partnership], for instance. But Donald Trump has been all about, ‘We’ve been doing bad deals with the world’; whether it be a free trade agreement with China; whether it be TPP, or whether it be who pays for NATO or who pays for the UN.
So, I think Donald Trump’s tactic is to get on Twitter and use it as a bully pulpit, declare victory when some companies move their plants back to Michigan or choose to build in the United States — in Alabama, in the auto sector, for instance. All he needs to do is to declare victory for a couple of high-profile deals but do very little to impact on trade policy.
So far, that’s what he’s done. He’s announced victory for a couple of key manufacturing deals and he’s just delaying all the good work that Janet Yellen did at the Fed to ensure that we see employment growth. That’s all he needs to do, and American trade policy is principally determined by Congress rather than the President.
Strong labour market growth coupled with low wages growth is a phenomenon common to many developed economies due to factors such as technological innovation and increases in casual positions. How do you see this trend playing out in 2018?
Australia is not immune from the disruption in the labour market and the ‘gig economy’, whether it be Amazon or Uber or similar type of organisations disrupting the labour market. I think the big worry in Australia is that for many years, particularly the 70s and 80s, we had very strong wage inflation. We deregulated parts of the labour market and now we have, if you like, a real wage under-hang where wages aren’t growing strongly enough.
And the dear old Reserve Bank which called for a lot of de-unionisation and relaxation of collective bargaining is now asking workers to ask their boss for a pay rise. Principally, you do need unions and you need tribunals to ensure fairness in the labour market so that you do get wage growth. It’s not just a matter of an individual asking for a pay rise. That might work for [Australia’s cricket captain] Steve Smith, but it doesn’t work for everyone in the labour market as simply as that. So, we do have a weakness in terms of wages in the Australian labour market.
Finally, what are some of the main domestic factors and indicators that you’ll be watching closely this year?
There’s been a bit of a paradox in Australia where we’ve had quite strong corporate profits, quite strong business conditions, but consumer confidence is quite weak because of the casualisation of the labour market and because of some unsustainable levels of household debt and housing prices. So, that’s areas of weakness to watch. That’s why policymakers are looking at negative gearing and other types of policies that impact on the housing market.
I think also in the labour market there’s been a big onset of labour supply with the expansion of healthcare with the National Disability Insurance Scheme, which has meant that a lot of people who were caring for free can now enter the labour market. Now I think that’s putting downward pressure on wages as well, despite the healthy construction activity we’re seeing.