- The Commonwealth Bank has revealed its economic forecasts for 2020, delving into what will move Australia and the world this year.
- Chief economist Michael Blythe has identified domestic factors that will affect the country's fortunes including consumer spending, business investment and construction rates.
- Blythe also says mini-booms – including LNG exports, infrastructure, and a growing Asian middle class – which have underscored Australian economic resilience are hitting ceilings, and might not keep growing in 2020.
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The nation's largest bank has been staring into its crystal ball.
After a pretty average 2019 for Australian growth, the Commonwealth Bank is quietly optimistic things are looking up in the new year.
"The Australian and global economies wandered down a depressingly familiar path in 2019 as economic growth disappointed," CBA chief economist Michael Blythe writes. "[But] the array of forces at work on the Australian economy are set to skew in a more positive direction in 2020."
Expecting 2.5% growth and stubborn unemployment, however, CBA isn't getting carried away. With global issues like a US-China trade deal and Brexit still unfolding, and risks of a US recession, a Chinese slowdown and a weak Eurozone, there is still plenty weighing on its forecast. Importantly, Blythe believes Australia is better insulated against these crises than others.
"We are well placed to deal with those risks. Policy options are available and the nature of Australia’s trading relationships will help," he notes.
Closer to home, there are four factors that the Commonwealth Bank thinks are worth keeping a close eye on, and whether will determine if 2020 is a year to remember or forget.
1. Australians need to get spending
It's the never-ending story of Australian economics: we're scared to spend and it's hurting us all.
In fact, if only consumer spending – the biggest part of the Australian economy – made a sustained recovery, it could make all the difference: potentially leading a retail recovery, cutting unemployment, raising wages, and spurring inflation. It would also help Reserve Bank of Australia (RBA) governor Phillip Lowe sleep at night, given he's been preoccupied with this very quandary for years.
"Consumer spending accounts for 56% of GDP so the constrained consumer is the biggest domestic risk facing the Australian economy," Blythe said, noting during the last five years incomes have grown 1.6% on average, just half the rate of the previous five.
Missing wage growth combined with rising taxes, job insecurity and growing household bills have all helped kneecap what we're all spending. Two demographics, however, are faring worse than average, with Blythe noting its Generation X and millennials who are the hardest hit, as a result of hefty mortgage debts, dependence on weak wages and family commitments.
What's going to help?
"Further inroads into labour market slack would help break this cycle and this idea lies behind the RBA’s refreshed interest in achieving full employment," Blythe said.
Recent interest rate cuts haven't helped cut unemployment markedly or increase spending so it's unlikely the RBA is going to tick that goal off anytime soon without the government splashing some cash of its own.
"Our clear preference would be for more fiscal stimulus via income tax cuts. Tax cuts boost disposable incomes for all households, not just those with a home loan," Blythe said. "They can be structured in a way that increases the likelihood that the income boost is spent."
The government's reluctance to spend though again makes it look unlikely it will move unless the economy materially worsens. But call me a cynic. A surprise turnaround is what we need.
2. We're not building homes quickly enough
After consumer spending, it's the property market that maintains a hold over dinner time conversation as well as the economy.
"Falling residential construction since the 2018 third-quarter peak has reduced GDP by 0.6 percentage points to date," Blythe said, noting it has a way to fall yet. "Ultimately, we expect the peak-to-trough decline to be equivalent to 1% of GDP and we expect to get to that trough by mid 2020."
Given the length of construction cycles, it takes time to kickstart that cycle all over again and start building enough homes to satisfy demand. Unfortunately, the trough isn't likely to be following by skyrocketing activity either, and could take some time before it gets firing again.
It could see prices in cities like Sydney and Melbourne take off again, as demand overruns supply. Importantly, legitimate concerns about the quality of new apartment buildings will also slow the construction recovery, Blythe notes. Turns out images of Sydney buildings infamously cracking last year is a hard one to shake.
3. Businesses need to be confident enough to invest
Guess what? Consumers aren't spending, but neither are businesses. This, in turn, prevents productivity growth, something for which the Australian economy is crying out. Global uncertainties are partly to blame, but no excuse, according to Blythe.
"Uncertainty is understandable but a recovery in risk appetite [from businesses] is needed," he said, noting interest rate cuts had actually spooked companies.
"Further rate cuts won’t help. Business surveys show that corporates do not see the level of interest rates as an issue. In fact, rate cuts may be lifting fears about the outlook and acting as a disincentive to [spend]."
It'll be then up to the government to rejig policy to incentivise businesses spending, with CBA going as far as to suggest business tax cuts might need to be put on the table. Here, more so than on other points, the big bank is optimistic, if only moderately.
"[Mining] spending looks set to increase over the next couple of years... [and] we expect overall business investment spending to record a small rise in 2020."
4. How will Australia's three 'mini booms' fare?
The final piece of the puzzle as it were is if three small economic booms continue on through the new year.
"The LNG [gas] boom, the infrastructure boom and the Asian income boom have proved reliable baseload providers of economic growth over the past few years," Blythe said.
In other words, exporting our huge gas reserves overseas, selling our products to a growing Asian middle class, and erecting new infrastructure as quickly as we can build it has helped pump money through the economy and create plenty of jobs. These were all "guaranteed" in a sense to long-term trends and contracts Australia had signed. Now here's the rub.
"All of these guarantees will remain in 2020 but the contribution to bottom-line economic growth is set to wane," Blythe said.
Basically, we can't really increase the amount of gas we export or build any more infrastructure than we are right now. While both will still help keep the economy ticking alone, they won't help the economy grow faster than it is currently.
Equally, while the 'Asian Century' will still prop up national prosperity, there are pressures, according to Blythe.
"Growth in tourists from China, for example, is showing signs of plateauing and it remains to be seen if the bushfires damage tourism prospects."
The impact to all international tourism will become clear in the coming months, and indicate whether or not we might have a bigger problem on our hands.