Brighter international growth prospects
Last week we wrote about how Australia’s growth performance had become a tottery balancing act weighed by gloom showing no signs of lifting in household spending. In contrast to Australia, the United States, is showing signs of growth, assisted by strength in household spending. The underpinnings of household spending growth are distinctly different in the US and Australia – in the US decade high wages growth, 3.1% y-o-y; 50-year low unemployment rate, 3.5%; comparatively low household debt burden and in Australia weak wages growth, 2.2% y-o-y; 17 month high unemployment rate, 5.3%; and a very high household debt burden.
In Europe, China and Japan, leading indicators of economic activity relating to consumers, manufacturers and businesses are strengthening. Monetary easing and expansion in budget spending in China and Europe during 2019 point to stronger growth in 2020. Most recently, the dialing down of trade tension between the US and China with the stage 1 bilateral trade agreement and the more certain path to Brexit after the Conservative’s landslide victory in the British General Election reduce the political headwinds to better global economic growth.
Global economic growth prospects for 2020 are showing more signs of improvement than Australian growth prospects. If this difference in economic growth prospects persists, it is likely to influence the differential between Australian and overseas interest rates – greater prospect of more RBA interest rate cuts and Australian interest rates generally staying very low compared with their US counterparts – promoting bouts of weakness in the Australian dollar exchange rate.
Of course, if global economic growth including growth in China improves and with lessening international trade tensions both Australian exports and Australian exporters’ incomes are likely to grow, potentially more than growth in 2019. During 2019, strong exports and exporter income has been one of the factors helping lift Australian economic growth in the face of weak home building activity and household spending. The support from exports for growth in 2020 is unlikely to be less than in 2019 and could be a little more on improving global growth prospects.
Better export growth and incomes are too narrowly based to lift Australian growth prospects, but are probably enough to ensure that the risk of Australia sliding into recession in 2020 is low.
There is still a slim chance that Australia’s growth rate will accelerate to match the US in 2020, but conditions revolve around lifting confidence among Australian households and businesses to spend more freely rather than saving more.
The key factor that needs to fall into place is instilling the sense that business and household incomes will rise. Household disposable income had a rare strong rise in Q3 2019, mostly coming from the tax cut (the lift in the low-and-middle income tax rebate for 2018-19). For the next year or two, the supply of labour in Australia is growing faster than employment, keeping wages growth subdued. The only way of ensuring that household disposable income continues to grow strongly is to continue to deliver income tax cuts and ensure that recipients of government payments receive well above CPI increases in payments too. Without firm community belief that household disposable income will grow more strongly, it is unlikely that community confidence will lift, promoting greater spending and less saving.
Australian businesses also need to be convinced that their tax burden will decrease over time if they are to invest more in the future of their businesses. Delivering greater tax cuts and benefits means that the Government will be spending more and saving less at the margin pushing the budget back into deficit. That should not be regarded as a negative development when shows that the key spending groups in the economy, households, businesses and the Federal Government are trying to save more all at the same time.
The most extraordinary evidence of this change in Australian saving behavior shown is in the balance of payments. The quarterly current account position on balance of payments swung into surplus in Q2 2019 for the first time in 44 years. The balance of payments as its name implies, balances. When the current account is in surplus, there is an equivalent deficit or outflow in the capital account. Typically, since the mid-1970s Australia has run deficits on the current account and has been the recipient of continuous and equivalent capital inflow. Another way of looking at the prevailing balance of payment dynamics is that Australia has had greater investment opportunities than its capacity to fund from domestic savings and has continuously drawn on overseas savings (capital inflow) for top up.
Over the past year, the balance of payments has shifted dramatically. In Q3 2018 the current account deficit was $A10.2 billion(bn), narrowing to $A6.5bn in Q4 2018, $A1.7bn in Q1 2019, turning to surplus of $A4.7bn in Q2 and $A7.9bn surplus in Q3. The current account position has swung from 2% of GDP deficit in Q3 2018 to 1.6% of GDP surplus in Q3 2019. Australia’s call on overseas savings has swung 3.6 percentage points of GDP over the same period, highlighting how much domestic saving has lifted over the same period and the increasing headwind to domestic spending over the same period.
If Australia is to fully share better growth prospects like the rest of the world in 2020 it will need to spend more and save less at the margin. Changing the spending/ savings behavior of Australian households and businesses is likely to be very hard in the near-term unless there is a clear lead from less saving by the Federal Government helping to provide greater certainty of higher after-tax income for Australian businesses and households.