MORE UPS AND DOWNS FOR AUSTRALIA AND THE GLOBAL ECONOMY
IMF lowers its global growth forecasts; global equities bounce; labour market underemployment remains, Shane Oliver’s view
In his weekly summary of Australian and global market activity, AMP Chief Economist, Dr. Shane Oliver says, “It’s no surprise that the IMF (International Monetary Fund) has revised down its global growth forecasts yet again to 3% for this year and 3.4% for next, this is just catching up to the reality as already reflected in share market volatility, lower bond yields and central bank easing.”
IMF Director of Research, Gita Gopinath, announced, “The global economy is in a synchronized slowdown and we are, once again, downgrading growth for 2019 to 3 percent, its slowest pace since the global financial crisis.
“We (the IMF) estimate that the US-China trade tensions will cumulatively reduce the level of global GDP by 0.8 percent by 2020. Growth is also being weighed down by country-specific factors in several emerging market economies, and by structural forces, such as low productivity growth and aging demographics in advanced economies.
“The weakness in growth is driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods. In addition, the automobile industry is contracting owing also to a variety of factors, such as disruptions from new emission standards in the euro area and China that have had durable effects. Overall, trade volume growth in the first half of 2019 has fallen to 1 percent, the weakest level since 2012.”
Dr Oliver’s takeaway for market is that, “After a brief interruption through 2017 we are back to the pattern seen through much of this decade which has seen initial optimism for growth of around 4% for the year ahead give way to downwards revisions to around 3%.
“The downside is that stronger growth remains elusive, but the upside is that it prevents the build-up of excess in areas like inflation and so keeps the investment cycle going.”
The past week saw most major share markets continue to push higher helped by the lessening in geopolitical risks around trade and Brexit and a solid start to US September quarter earnings reports. US shares rose 0.5%, Eurozone shares gained 0.3% and Japanese shares rose 3.2%.
Chinese shares fell 1.1% partly on the back of soft economic data. Australian shares also rose by 0.7% with solid gains in energy, health, consumer discretionary, industrial and financial shares but a sharp fall in material stocks and reduced expectations for rate cuts held the market back. Bond yields generally rose as growth fears continued to recede a bit. Commodity prices were mixed with copper up but oil and iron ore down. The Australian dollar rose on reduced expectations for near term rate cuts and a fall in the value of the USD.
Interest rate policy continues to weigh on investors, “Market expectations for further Reserve Bank of Australia (RBA) rate cuts for this year fell sharply over the last week,” says Oliver, “but it looks like an over-reaction to us.
“The hawkish turn in rate cut expectations reflects a combination of the RBA minutes running through the arguments against further rate cuts, a slightly better than expected jobs report for September, RBA Governor Lowe emphasising the RBA’s upbeat view on the economy seeing a return to trend growth next year and a return to optimism in global financial markets generally after the recent lessening in geopolitical risks.
“Our view is that while September’s slight fall in unemployment may have bought the RBA a bit of breathing space and that the list of positives Governor Lowe refers to will help avoid a recession, we doubt growth will be strong enough to achieve full employment and get inflation back to target anytime soon.”
Oliver also noted, “Governor Lowe’s comment about negative interest rates being ‘extraordinarily unlikely’ in Australia and a move to negative rates are ‘not the assumption I’d encourage’ are consistent with the RBA’s earlier expressed scepticism about the value of negatives rates.”
In charting labour market underutilisation, AMP Capital notes, in Australia it is still very high at 13.5% and has had to fall all the way to 6.9% in the US just to get 2.9% wages growth, so Australia has a long way to go before it gets to full employment and decent wages growth.
Forward looking labour market indicators like job vacancies are pointing to weaker employment growth ahead suggesting that unemployment is unlikely to fall anytime soon.