The ups, downs and roundabouts for Australia’s economy in 2019


Before we get stressed out over whether we have spent too much this Christmas, there should be some welcome news in the early stages of 2019.

Earlier this week the mid-year budget review suggested treasurer Josh Frydenberg had almost $10 billion in the kitty to dole out on sweeteners in a desperate attempt to cling on to power next year.

Whether this takes the form of further personal income tax cuts remains to be seen, but the government hasn’t ruled it out.

At the same time, and particularly if you have a home loan, it looks like another stable year for interest rates –  small mercies in what could prove to be a difficult year ahead.

Elections

Firstly, there are two elections to deal with in the first few months of the year – a poll in our most populous state of New South Wales in March, followed by a federal election likely in May.

Elections are notorious for knocking the wind out of confidence.

There is talk Prime Minister Scott Morrison could call the national vote before the state election, despite opinion polls pointing to a Coalition electoral disaster.

But whatever the case, you can be sure there will be plenty of scaremongering between the warring political parties during the six-week federal campaign. And some of it might be true.

Cost of living

Then there is the cost of living.

Figures in recent weeks show household spending is in decline and people are having to dig deep into their savings to make ends meet.

The federal government and Reserve Bank keep assuring us wage growth will accelerate over time, as more people get jobs and the pool of potential workers dries up.

Annually, wages are presently growing at a three-year high of 2.3 per cent, above inflation but still remain close to the recent two-decade low.

Treasury’s projection of a 3 per cent wage growth rate by the 2019/20 financial year, and even higher in the following years, still looks optimistic at this stage.

Jobs

Despite the government’s boasts that more than 1.1 million jobs have been created since the coalition came to power in 2013, the outlook in the mid-year budget review was extremely conservative.

While the latest unemployment rate did tick-up to 5.1 per cent, Treasury expects it to return to a six-year low of 5 per cent this financial year.

But that low apparently is about as good as it gets over the next three years.

Even the Reserve Bank, which is not known for wild claims, is anticipating a rate of 4.75 per cent to prop up wages growth overtime.

House prices

Then there is the impact on household’s perceived wealth from the decline in house prices.

How much further prices have to fall after an unsustainable rise to ludicrous levels in Sydney and Melbourne is anybody’s guess, although there are plenty of “experts” out there that will have a stab at it.

What must be remembered before getting in a panic is how far house prices previously rose.

The International Monetary Fund in its annual appraisal of Australia calculated in the past 10 years, house prices nationally rose 70 per cent, roughly by 100 per cent in Sydney, and 90 per cent in Melbourne.

It puts the respective falls of 4.1 per cent, 8.1 per cent and 5.8 per cent in the past 12 months in perspective.

International conditions

While there is plenty to keep us on our toes at home, international events are also worth keeping a wary eye on.

An escalating trade war between the US and China will be in nobody’s interest, particular for a trading country like Australia.

With US President Donald Trump at the helm there is no saying how this will be resolved between the world’s two biggest economic giants.

At the same time, the UK is due to formally leave the European Union in March, yet no Brexit deal has so far been struck. Again, there is no certainty how this will turn out.

Such events, and the potential for even higher interest rates in the US, have produced extreme volatility in global share markets in recent weeks, a worry for investors and people looking to build up their superannuation nest eggs.

The budget

This brings us back to Australian politics and the budget.

While the government’s continual spruiking of a budget surplus may leave a lot of voters cold, the practicalities of having the national finances in order does mean if there is another global downturn, the authorities have the money to build up our economic defences.

Interest rates

Taking account of all of the above, the Reserve Bank is unlikely to follow the US Federal Reserve into higher interest rates any time soon.

The minutes of the central bank’s December 4 board meeting released this week re-emphasised its expectation that the next move in the cash rate will be up, having been at 1.5 per cent since August 2016.

However, that meeting was the day before the latest national accounts, which proved much weaker than expected and even had some economists talking about the need for further rate cuts.

So cheer up, there are some silver linings amid the doom and gloom. Merry Christmas.

Colin Brinsden is AAP’s former economics correspondent based in the Canberra Press Gallery.



Source link Finance News Australia

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