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JP Morgan on the 4 factors that will shape the Aussie economy in 2019

Sydney is often referred to as Australia’s financial and business services hub. Photo: Getty

The next year is just around the corner. And thanks to unresolved global tensions and yet another change in government hanging over our heads, 2019 looks to be fraught with more volatility for markets and economies around the world.

In order to find out what would be shaping the agenda for the Australian economy next year, Yahoo Finance went straight to the experts. This is what JP Morgan Asset Management’s Kerry Craig told us.

The first thing to note is that “great growth” this year will give way to “good growth” next year, with Australia no exception to this.

“However, the high levels of household debt and potential for increased borrowing costs raises the risks around the economic outlook,” the global market strategist noted.

1. Consumer spending

This is “the most important factor to watch”, according to Craig, with household consumption accounting for more than half (approximately 55 per cent) of the domestic economy.

A happy consumer means higher growth, but this year the consumer has been willing to spend at the expense of saving – but there’s no signs that this attitude will carry through to the new year.

“The ratio of savings to disposable income is now at one per cent, the lowest in a decade, and means that households have very little buffer against an income shock,” Craig said.

“It would be difficult to expect this to continue and while wages are slowly rising; it’s not fast enough to deliver the same thrust to growth from the consumer in the year ahead.”

2. House prices

Aussies’ spending habits are linked to the price of their homes, Craig noted. “This is the wealth effect from housing which can drive sentiment towards spending.”

And with a number of property markets in Australia dipping of late, people might be less inclined to spend big in order to pay off their debts.

“Especially as they anticipate higher borrowing costs as mortgage lending criteria are tightened up and the outcomes from the Royal Commission into Banking in 2019 is digested by the large retail banks,” he added.

3. The Federal election

With a Federal election likely in March 2019, Craig pointed out that potential policy changes on “tax, dividend imputation and negative gearing” could have the “potential to cause disruption”.

But it’s not all bad news – higher commodity prices in early 2018 have afforded enough of a buffer for the current government to make “plenty of spending promises” that could still be made in the run-up to the election.

4. The US-China trade spat

Since late January this year, the conflict between the two superpowers has been one of the biggest events that have rattled share markets and carried major consequences in terms of political and trade. This is likely to bleed into the next year, the global market strategist noted.

“The resumption of talks between the two governments is encouraging but the flow of news around trade will continue to reverberate throughout 2019 and is unlikely to be all positive and potentially weighing on business spending.

“Just how much China spends to stimulate its economy will have a flow on effect to the rest of the Asia Pacific region and to Australia,” Craig concluded.

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