Economic outlook looks good
“HAPPY New Year”. For once it’s not just a generalised season’s greeting and indirectly a final comment on 2017, but a pretty realistic assessment of the outlook for 2018.
At least, that is, for the start and indeed opening months of the year – as a broad brush, perhaps to the Budget in May. On a more granular level, the very fact of the “opening good times” will in themselves trigger market reactions and policy responses that will then feed back into the local and global economies and to investments.
Take the simplest, clearest example. The good economic performance in the US will both allow and indeed promote further official interest rate rises from the Feds. While they are now expected, their actual delivery will affect bond, share and currency markets when delivered.
The big question, the new “great uncertainty” is whether the rate rises – and it’s not just in the US but in Britain and Europe – will be “too little too late” and so we exit 2018 with inflation beginning to become too high a problem again and as a consequence global share and bond markets are teetering or have actually teetered.
Or whether the combination of the overall tsunami of “digital disruption” and all the successive mini-tsunamis of specific disruptions – from Amazon to self-drive cars – along with the concentration of manufacturing in lowcost Asia really has locked in a sustained age of deflation. So the rate rises are minimal. Obviously, that’s something that is going to play out over years rather than just a year. Its relevance to this comment is its likely intersection with higher global interest rates towards 2019, and so why the end-year outlook is far more clouded.
But the immediate future, with the exception of property, looks pretty predictable and the prediction is broadly positive. That is not to suggest the property outlook is bad, more that it’s “complicated” – both as to cities: Melbourne and Sydney versus the rest and type: new units versus houses.
First, the global economic outlook is looking pretty good, led by the US, which is not just 25 per cent of the global economy but the great driver of both entrepreneurialism and also the new digital economy of the Apples, Amazons and Facebooks.
Donald Trump’s 21 per cent corporate tax rate really is a global gamechanger – for the good. We’ll benefit from the general boost to the global economy. We would benefit a lot more if we moved immediately to follow, at least to 25 per cent.
It’s important to understand that the US and global upside has not been understood in Canberra. Treasury’s reasonably optimistic forecasts for the Australian economy assume only sluggish growth in the US. They are going to be surprised on the upside.
China is the other elephant in the room for us and it’s going to prove a friendly elephant – at least, in terms of the economy.
The China of the past two years or so has defied the predictions of, if not doom, the end of the China boom. That’s going to continue in 2018. China’s not going to go back to the crazy days of 2010, which sent commodity prices to crazy levels, but it is going to underwrite sustained solid demand for our coal and iron ore.
Also pouring rising sums into our tourism, sustain spending on education and then there’s property.
Clearly the China surge into highend properties of an elite group of global cities – led by London and New York and including Melbourne and Sydney has peaked. In some places prices are off in double-digits. Apartments are more complicated. They are much more vulnerable to Chinese controls on outward investment. But they are also driven by domestic investment demand and continued population growth.
In short, Melbourne and Sydney property is headed for a digestion period. But the good global economy will limit both the “digestion” and the “period”. The rest of Australia will continue pretty much as before, while Brisbane has had an apartment overbuild, which it will continue to clear through the year.
Underlying all of this is no change in the Reserve Bank official interest rates, at least in the opening months.
We might see some small adjustments higher in actual bank lending rates – depending on how quickly higher rates feed into Wall St. Trump’s tax cut has underwritten Wall St itself; brutally our market doesn’t have the stocks to really benefit.