Fresh economic data last week confirmed what many in Australia had already suspected: The nation’s economy is falling into a funk.
With growth slowing to a snail’s pace, the only thing keeping the country out of recession territory is a rising population driven by an immigration boom.
A year ago, the smart money was on a rise in interest rates as the Reserve Bank responded to good economic news.
But now the best bet seems to be two rate cuts that would bring down the RBA’s cash rate to a minuscule 1 per cent.
The worrying thing for all of us – workers, business people, investors and retirees – is that the pall cast over us has also spread across the world.
Stephen Anthony, chief economist with Industry Super Australia, says “back at Christmas 2017, economists were seeing synchronised good news. By Christmas 2018 things were gloomier,” he said.
Over the past year the Euro Zone has weakened from a position where it was seen as strongly in recovery to a weakening environment, with its GDP growth slumping to 1.1 per cent.
Its economic powerhouse, Germany, is limping along at 0.6 per cent and German bonds are only returning 0.06 per cent to investors.
Anarchy in the UK
Brawling over Brexit and the future of the country has weighed on the UK economy too. Its GDP has weakened to 1.3 per cent and Nicki Hutley, economist with Deloitte Access Economics, is “bearish”, as Brexit has “hit confidence and investment”.
However, Ms Hutley says there is one positive for Australia: “Europe is not relatively as important to Australia as it used to be”.
But the two main games to watch for Australians in terms of our economic wellbeing are being played out in the United States and China.
The United States
Uncle Sam is still the world’s economic powerhouse and has been a good story in recent years. Unemployment is low, and the Trump tax cuts have driven growth.
Ms Hutley describes the country as experiencing “solid growth of between 3 and 4 per cent and healthy consumer confidence”.
However, Peter Brain of the National Institute of Economic and Industry Research, sees trouble on the doorstep.
“The central concern is fiscal [tax and spending] policy in the US. It’s heading for a $US1 trillion deficit and if things don’t change, its debt-to-GDP ratio will be equal to that at the end of World War II.”
Markets won’t continue to fund that, he says, and the effect will be rising interest rates that would flow through to Australia, where high levels of household debt would make that “a disaster”.
Europe, which was looking good, “has fallen off a cliff in the last six months”, Dr Brain said.
Where you lead I will follow
Mr Anthony says the key to seeing where economies are going is in the relationship between activity and central banks’ approach to credit.
Where credit is tightened (cutting available funds), activity will soon fall also as consumers and business spend less.
What these charts show is that in three out of the four areas covered, tighter money is affecting activity. In Japan, both measures have been in a downwards pattern. In Europe recent tightening is causing output to fall and in the US the story is the same.
Only China is a standout, with activity and credit availability broadly in an upward trajectory.
China’s economic position is considered opaque, with few believing the official statistics in a state where the Communist Party sets the agenda. That makes China-watching an important activity.
“There are significant doubts about the official numbers, but the level of iron ore and coal prices give you a sense that the economy is fairly strong,” Mr Anthony said.
Dr Brain said bearish concerns about China are “unjustified”.
“It has huge foreign reserves, and that means its central bank can write any cheque it wants,” he said.
So, as happened after the financial crisis, China may have the firepower to help keep Australia’s economy from a major slump.