We’re actually in good shape

Spotlight 14 July 2017

ANZ’s chief investment officer Mark Rider hands out a mid-year report card for the Australian and global economies.

Don’t get too distracted by house price worries or fear of rate-hike speculation, the Australian economy is continuing to perform well, as it has, more or less, for the past 27 years.

Yes, it’s been that long – Australia’s last recession (six months of negative growth) was 1991. The longevity of our economic stability and growth is unparalleled around the world. But on that note, be assured that the global economy is now also performing well.

It’s really emerging from the devastating blow that was the global financial crisis. It has been since 2009, but growth is looking quite a bit better this year and has broadened to Europe. And there’s more to it than the impressive headline-grabbing performance of the US sharemarket, growth is synchronised across most economies now for the first time for some years.

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Australia – things are tight, for now

Currently, the Australian household sector is under pressure, with income growth the weakest since 1991 due to soft wage growth and working hours. With high levels of debt and residential construction falling, household spending could soon start to feel even more pressure.

Because of the constraint to date, people are spending the money they ordinarily would have saved, and this isn’t sustainable.

In May we had the good news of 2 per cent employment growth and a falling unemployment rate buoyed by a lift in full-time jobs, but wages are growing very slowly – at 1.9 per cent – and show no signs of recovery: so there’s no fuel to reignite household consumption, which is a critical driving force for the economy.

On the plus side – as per the record of the past 27 years – as one sector rolls over, another picks up. Australia now seems to be benefiting from the long-awaited recovery in non-mining business investment. So, while income growth of households is weak, companies’ profits are rising due to the relatively tepid cost of labour.

And given Australia does tend to match global economic growth trends, we may also be able to somewhat rely on the strong global economy supporting domestic growth.

It’s not about Trump

And the world economies are proving their strength.

To understand that it’s important to look beyond the headlines (and possibly the tweets) crediting sharemarket growth in the US to the election of Donald Trump in November 2016. He was not, and is not, the sole driver of this surge.

The US election certainly did provide some impetus for growth, with the new administration’s promises to spend more, relax the rules on banks and cut taxes. However, data shows that global manufacturing was already turning for the better even before Trump’s surprising victory.

It was this improvement, and the eventual recovery in the earnings of US business, that strengthened the sharemarkets.

And while we’re reaching some maturity in world economic growth, shown by the US and China losing some momentum, Europe has continued to improve. This kind of synchronised growth is a much bigger story than whatever optimistic economic surge resulted from Donald Trump’s election.

So shares, the world over, are in their ninth year of growth, known as a bull run. It’s fair to say markets are somewhat expensive. However, they are still well below what we saw during the early 2000s tech-bubble period.

On the other hand, the value of shares is actually above what they were just before the global financial crisis hit. Though that itself shouldn’t be cause for alarm, as unmet expectations for sizeable company earnings caught the sharemarket out then.

To understand what we can expect from now on, the rising prices of goods and services is the critical factor to watch. For now, inflation is mostly falling, which means interest rates will be kept low, giving more room for growth. But we’re expecting rates to rise slowly and hopefully sustainably.

Resilient Australia

The global economic growth trend probably won’t last as long as ours has. Our rolling recovery, since the 1990s, excels the world’s major developed economies such as Japan, France and Germany. Mostly, we’ve grown faster than them and even when we weren’t, we were still doing well.

That’s partly due to a pattern in our economy that as one sector slows another picks up the growth baton. In recent years mining was the hero sector, but as that waned (falling from 9 per cent to 4 per cent of our economy), it was largely the construction sector picking up the slack.

The Australian sharemarket hasn’t been performing as the same level as global markets. Not that it’s been terrible.

So, overall, there’s good reason to be optimistic. Low inflation and low interest rates suggest economic growth still has some way to go, in Australia and around the world.