Economic outlook for 2019

15 May 2019

Overall, we are likely to see a slowdown in growth for both the Australian and global economies over the next year. Upcoming elections, including our own Federal election, will have a major influence on the economy as will government spending.

In Australia, new lending standards will continue to affect lending levels which, in turn, will influence property prices and the overall economy.

The global economy

The global economy is predicted to be slow this year. Europe and Japan are both at risk of being in a recession. However, the outlook for the US remains positive as its economy performed relatively well during 2018 and still appears to be the most robust developed economy so far this year.

Globally, interest rates are on hold as a slowdown in growth alleviates any pressure to raise rates. However, central banks may try a mix of rate cuts and unconventional policy measures in a bid to stimulate growth.

The US and China trade war

The trade war between the US and China dented investor confidence in 2018. We anticipate a deal will be agreed between the two nations later this year. In the meantime, news on the trade negotiations may contribute to market volatility.

Brexit

As the UK Parliament could not find consensus, Brexit has been delayed until 31 October but may occur earlier if a consensus can be reached. There’s still a strong case for passing a deal but observers underestimated the division within the Parliament. This has prevented successful negotiations both within Parliament and outside the UK over the past year.

European Union elections

Anti-European Union populist parties are likely to attract more votes compared to previous elections. This is because of voter discontent with an economic model that has struggled to deliver jobs and growth for voters. This has led to protests such as the ‘yellow vest’ protests in France which were a reaction to tougher living standards.

Further government spending may be needed to address these problems with signs that both Italy, with an unemployment rate of 10.5%, and France, with an unemployment rate of 8.8%, will increase government spending during the coming year. In these countries, many people are unemployed, relative to recent history, making their lives tougher and prompting protests and populist wins.

The Australian economy

The Australian economy is likely to slow throughout 2019, continuing the weak economic growth experienced in the second half of 2018. This is due to weaker consumer and business sentiment influenced by a mix of weaker global growth and the decline in house prices

However, population growth which, in turn, grows the economy, interest rate cuts and government stimulus could help offset this.

Property market

The property price correction is likely to continue until the end of 2019, perhaps beyond.

Borrowers are finding it harder to meet lending standards and this has seen lower levels of investor lending especially in the key markets of Sydney and Melbourne.

As illustrated in the graph below, credit growth (in blue) has generally been a predictor of future house price growth (in red). Current (weak) lending points to falling house prices in the short term.

Figure 1: Annual housing price growth versus housing finance growth, Sep 05 to Dec 18

Unemployment

The labour market tends to lag behind other parts of the economy and therefore it is anticipated that unemployment will increase owing to the lower economic growth outlook for Australia.

Interest rates

The Reserve Bank of Australia (RBA) will probably make at least one interest rate cut by the end of 2019 as the weaker economy and inflation outlook prompts a response from the RBA. Inflation continues to track below its 2% minimum target.

Figure 2: Annual inflation versus interest rates, Jun 08 to Dec 18

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