This week the Australian Institute of Company Directors (AICD) has been touring the country to deliver their annual Essential Director Update to their members.
It was refreshing to hear Stephen Walters, AICD Chief Economist, present an upbeat report against the backdrop of Australia’s 26th consecutive year without a technical recession. His view is that it is mainly good news for the economy, with a positive outlook for 2018. This is consistent with what we are seeing.
Stephen noted that there are risks (but there always are) namely unprecedented household debt, low wages growth and increased energy costs.
Following is a summary of the “mainly good news” for the economy.
Mainly good news for the economy
Stephen Walters, AICD Chief Economist, opened his address by noting that Australia has enjoyed a record run and the economy has been agile enough to avoid two quarters of contraction: following the GFC in 2008/09 and the Queensland floods in 2011. The economy delivers in the range of 2 – 3% growth.
However, Stephen struck a cautionary note that we have built up excesses during the “good times” that we will carry into the next recession, especially household debt and poor productivity. The lack of a policy reform agenda by the Government is another symptom of this complacency. This means that policy is missing bold reforms and restructuring. Stephen reminded us of the maxim “never waste a crisis”. Historically, economic crises usually strike every seven years and help to drive reforms and restructuring.
On investment, Stephen told us that non-mining investment is growing after a flat five years. Investment is occurring in mining, government/infrastructure and exports. Conversely, there are weaknesses, with households holding the second highest debt ratio in the world. Residential property – and more specifically CBD apartments – are showing signs of oversupply.
On interest rates, 3% was considered an emergency rate during the GFC. Yet rates have been around 1.5% for some time now. In his view, the record low interest rates will not remain for much longer. We can expect to see interest rates start to rise in mid-2018.
On global growth, and particularly China, there is a positive vibe. This began as soft indicators in sentiment and equities. Now broad global growth of 3.6% is expected. Australian exports are mainly sent to Asia with China accounting for one third, Japan 10% and the rest of Asia 10%. There is healthy demand from Chinese tourists and students and China is now the largest overseas user of Australian services. Chinese authorities are managing structural challenges well. Japan is benefitting from Olympic construction projects, although longer term may struggle due to low immigration and an aging population. US inflation and interest rates are growing as the US heads towards full employment.
On US politics, Stephen observed the many distractions of the Trump administration. However, substantive policies could greatly help with reforms, less regulation and lower taxes. Generally, these would mean more growth and lower AUD to USD exchange rate. Interest rate shocks around the world could stall the global recovery and isolationism, including Brexit and Catalonia, are potential concerns.
There are risks, as there always are:
- In Australia, there is potential trouble looming for households as a result of unprecedented debt levels
- Early withdrawal of low interest rates – when economies are still in “intensive care”
- Default in China over domestic debt
- If the global recovery stalls
- If geopolitical tensions boil over, not only with North Korea but also in the Middle East and the South China Sea.
I share the view that Australia is at risk of a possible hard landing for households as interest rates inevitable start to rise. More than half of the current workforce has never experienced a recession. It will be interesting to see how they react in the face of rising interest rates and low wages growth.