Australia’s Business Outlook in the ‘Trump’ era

In BICSI Bytes by

According to Deloitte Access Economics, global growth may be about to be pumped (or ‘Trumped’) by US tax cuts and infrastructure, though the likely fading of China’s property boom will work the other way.

As the headlines generated by President Trump may be far bigger than the policy changes he can get through Congress, Deloitte doesn’t see the US as a game-changer, but rather as the dominant driver of an upside surprise for global growth in 2017.

Australia deliberately chose to go from a ‘China-boom’ to a ‘housing-price-boom’. And, so far, that’s worked. Growth has been below trend, but still enough to drag unemployment down from its early 2015 peak. Given the alternative of a bigger downturn, that’s been a pretty good outcome. And now the world is once again doing Australia favours, paying big bucks for our exports, particularly coal. Even better, the dynamics in world markets won’t turn on a dime: chances are China will be an ongoing good news story for Australia’s economy through 2017. Yet although that change in fortunes is very welcome, it probably isn’t permanent, mainly because China’s property boom will eventually lose its lustre. And here at home the boost to growth from lower interest and exchange rates is starting to lose steam – housing construction is nearing its peak, and retail’s run is moderating.

On the other hand there’s a bunch of good news. Some of that is temporary (such as a bumper wheat crop) and some of it will last longer (such as huge increases in gas exports and a lift in State spending on infrastructure). That mix should keep the home fires of growth burning by enough to leave unemployment relatively steady, and by enough to see Australia sail past the Netherlands to record the world’s longest ever spell without a recession.

President Trump has the reins of power, and OPEC wants to raise oil prices. But we don’t see either development as that dramatic, and so we still expect both Australia and the world to be slow to exit what’s already been a long-lasting bout of ‘lowflation’.
Here at home one key factor behind that will be lingering sluggishness in wage gains. Although there’s been some slight stirrings in surveys, today’s record low rates of wage growth may also linger for a while longer.

Interest rates will keep rising in the US, and other nations will eventually follow suit. But credit will remain super-cheap for some time. The new RBA Governor is a little more relaxed about low inflation, and a little less relaxed about crazy housing prices. That mix should keep the RBA on the sidelines, but not forever. By late 2018, rates are expected to be rising in Australia, and through 2019 much of the world will be seeing the same. Chances are the US$ will continue to rise versus other currencies, including the AU$. We see smaller US$ gains than some do, but those gains – and the threat of possible tariffs – could see the fall in China’s yuan accelerate through 2017.

Australia’s current account deficit is about to be smaller than at any time since Gough Whitlam was PM. Pumped-up commodity prices and a bumper wheat crop are boosting export earnings at the same time as the fast-finishing construction phase of Australia’s mining boom boosts exports and simultaneously cuts our thirst for imports. This good news on trade won’t last forever, but it’s great news on the balance of payments for this financial year and next.

The housing boom may be sprouting jobs – directly and indirectly – in NSW and Victoria, but job growth has slowed nationally. In fact, the only reason why unemployment has managed to stay steady is because more workers are retiring, and because there has been a switch from full-time to part-time employment. Job gains may stay in the slow lane for a while longer. Population gains are well down on past peaks, an ageing workforce is retiring, and the demand for workers – while very healthy in some service sectors – rests on a narrow base of outperformers (including the public sector, education and health).

Doing the sectoral shuffle
The industrial landscape continues to reshuffle, with the very top end of the sectoral leaderboard propelled by luck (with good rain granting growth to farmers), by demographics (true of health care), or by huge investment decisions taken years ago (as seen in mining). And just one peg below those leaders comes sectors which have slipstreamed low interest rates, including finance and retail. And then the next group has surfed the boost provided by a lower exchange rate, including both education (via foreign students) and recreation (via tourists).

Yet as great as that ‘good news group’ is, it is also vulnerable – particularly by 2018. The weather-driven boost to farming will be temporary, miners are cautious of developing new mines (commodity prices may not prove sustainable), interest rates are fading as a growth driver (and can’t fall too much further), while the AU$ has also increasingly done its dash as a tonic for development.

Technology is helping growth in some sectors (such as ICT and business services), but are weighing on growth elsewhere in the industrial landscape (such as printing, publishing, paper products). In addition, it’s still sackcloth and ashes through much of manufacturing, while the incipient downturn in the housing cycle (and even bigger downturn in the apartment cycle) will be an albatross for the prospects of property services and the utilities. Yet that mix isn’t the end of the world. Sectors associated with government spending and/or intervention – the public sector itself, as well as healthcare and education – look like seeing good news. And the negatives that smashed engineering work in recent years are fast coming to an end.

Once again, a two-speed split – but a different one this time
China may be juiced once more, but that isn’t true of WA, Queensland and the NT, who have been hit hard by the mining-related construction slowdown, and their rising exports haven’t filled that gap. With interest and exchange rates lower, the nation’s strongest growth has been concentrated in NSW, Victoria and the ACT. Yet, having experienced a big housing boom, NSW and Victoria are now faced with inflated housing values and a risk of apartment oversupply, while the stimulus from low interest and exchange rates may soon start to wear off. There may be a narrowing of State outcomes from 2018 onwards as WA, Queensland and the NT emerge from their downturn.

NSW’s cup of economic leadership is running over. Deloitte rates it as the fastest growing State in the nation off the back of a big boost from lower interest rates and the State’s infrastructure spending. But the joy of higher house prices will eventually evolve into the pain of higher mortgages.

Victoria’s resurgence has relied more on lower exchange rates, but very low interest rates and the strongest population growth in the nation have also provided a very handy fillip to growth. But apartments pose a risk, while the magic of lower interest and exchange rates will start to wear off.

Although Queensland’s economic growth is on the rise due to exports, it lacks a ‘feel good’ factor, with the domestic economy seeing little benefit.

SA is battling a critical loss of manufacturing and is overly reliant on Federal funding that is under extreme pressure. Yet the State’s economy is in better shape than it is often given credit for, albeit with some known big challenges ahead.

China’s economic transition means plenty of pain for WA. Business investment is now falling faster, making current conditions an even tougher gig in the West – though that’s an unavoidable phase after the boom the State had. The short term outlook is ‘more of the same’.

Tasmania’s economy is doing OK, with its relative performance helped by the fact that it doesn’t have to deal with the fallout of a mining bust. Yet the State faces key headwinds, including slow population growth and an ageing population. That may keep its growth on a relatively short leash.

The NT’s biggest LNG construction project is slowly moving towards completion, leaving the local economy wallowing in its wake. But the economic news should get better next year as the pain of slowing construction is finally outweighed by the impact of rising exports.

The ACT is one of the nation’s better performing economies. It helps that interest rates have been a growing positive at a time when the Federal Budget has swung back to being a tailwind – with the lack of parliamentary bipartisanship an unlikely but welcome growth engine for Canberra.