Is all well in Australia as we head into 2019?

Economics Event Debriefs

TMA Australia held its annual “Economic Outlook” events in Sydney and Melbourne on 5 and 7 February, respectively. In Sydney, over 170 guests attended and in Melbourne there was standing room only.

James Simpson and Vaughan Strawbridge from the NSW TMA Committee have prepared the following summary. We also refer you photos from the Sydney event and a blog from Kristian Kolding (Deloitte Access Economics).

The discussions focussed on global and domestic economic trends and potential monetary and fiscal policy responses.

Some of the key themes were:

The global economy is facing some unprecedented structural challenges. The reality of a hard BREXIT is becoming more likely and could push the UK, the world’s largest financial market, into a recession, potentially for the long-term.

America is facing an inverted yield curve and is entrenched in a trade war with China that is not showing any sign of abating anytime soon.

China’s economy is slowing, reaching 6.6% growth for 2018, its lowest annual rate of growth in nearly three decades.

Against this gloomy global backdrop, the sentiments expressed on the outlook for the Australian economy were mildly positive. The general view was Australia is currently in some form of mild credit crunch with house prices on the down and expected to bottom out at a 15% decline from the peak to trough, probably in late 2019 to early 2020. In the context of the gains over the past 10 years, 15% is not expected to cause widespread panic.

An increase in interest rates is generally accepted as a certainty, with the only question being when. But banks are already increasing their lending rates with no major impact on consumers being reported, and an increase in the bank rate won’t necessarily lead to further increases in lending rates. In fact, some market commentators are forecasting a 50bps cut to interest rates in the short term.

The real risks seem to be what unfolds in China, the real rate of growth and the sustainability of the levels of debt in state-owned entities.

Key takeaways:

1. The most likely outcome for the Australian economy in 2019 is continued growth
2. Commodity prices have been holding up, which supports large parts of the economy, and employment is at all-time lows
3. The Australian Dollar is likely to weaken, which would give the domestic economy a further boost
4. There is a diminishing likelihood of the RBA increasing rates this year, which had previously been expected
5. China is the main external risk for Australia, particularly if trade tensions with the US escalate and China retaliates with further tariffs
6. The other risk to focus on is Australian households, which are highly indebted and vulnerable to external shocks like a sharp correction in housing prices or a rise in unemployment
7. There is significant capacity for a fiscal policy response if an economic downturn was to emerge, with large-scale infrastructure needs that governments could address

Thanks to our Sydney host, Ashurst Australia. We also thank the speakers:

• Joanne Masters, Chief Economist of Ernst & Young Oceania (moderator)
• Su-Lin Ong, Chief Economist & Head of Australian Research, RBC Capital Markets
• Stephen Walters, Chief Economist, NSW Treasury
• Kristian Kolding, Partner, Deloitte Access Economics

Thank you to our Melbourne host, Deloitte Financial Advisory Pty Ltd. We also thank the speakers:

• Kristian Kolding, Partner, Deloitte Access Economics
• Alex Joiner, Chief Economist, IFM Investors
• Linda Blore, Division Director, Banking & Financial Services, Macquarie