Macro

Last month, there was probably no one more surprised than Australian Prime Minister, Scott Morrison – or “ScoMo” – to which he is commonly referred. ScoMo had just won a decisive victory in Australia’s general election against an opponent that was the short-odds favourite in the betting markets.

The upset victory for ScoMo’s conservative party has since sparked numerous press articles about a resurgence in business confidence and a return of the property booms in major cities. Even the domestic stock market experienced a bounce.

And yet, within weeks, Australia’s central bank cut its policy rate to 1.25 per cent per annum, its lowest level on record. According to its Governor, Philip Lowe, inflation pressures are subdued and are likely to remain so. Furthermore, Lowe continues to see significant spare capacity in the Australian labor market. The reasons? Slow growth in wages, the increased competition in retailing, as well as the property price downturn.

These sound like largely Australian-specific reasons for the change in monetary policy settings. And yet, it is worth noting that, at the same time, the yield on the US 10-year government bond has fallen by more than one third in just six months and is now at levels not seen for three years. Japan’s 10-year is also at its lowest in three years. In Germany, the 10-year government bond yield is at its lowest level on record – and by the way, it’s a negative interest rate, meaning you need to pay the German government for the privilege of lending to it.

You see, most of the world is experiencing a wave of disinflation. It’s not just Australia. And remember that Australia’s economy accounts for less than two percent of global annual economic output. Through this lens, in our interconnected world of today, it would be difficult to see how Australia could avoid the disinflation being experienced abroad.

From the perspective of global economic growth, the risks are surely skewed to the downside with the recent breakdown in the relationship between the US and Chinese governments. As readers will know, President Trump recently increased tariffs (yet again) on imports from China; and signed an Executive Order that effectively targets Chinese telecommunications equipment provider, Huawei. Irrespective of how China retaliates, it seems fair to conclude that any residual trust in the relationship has largely run out. And this spells downside-risk for future global growth, given the US and China are by far the two largest economies in the world.

Back to Australia: there are surely some domestic-specific drivers of the situation currently being faced. Take the property downturn, for example. There is no question that this is being driven, in part, by a significant build-up in household financial leverage – often subsidized by the tax payer and sometimes by unworthy borrowers.

But some of these disinflationary forces are being imported. Take the increased competition in retail, for example. This sounds like code for the “Amazon effect”. As we know, the internet has created a virtual teleport machine for consumers to shop anywhere in the world, any time of the day or night. No wonder domestic brick-and-mortar retailers are finding this new world tough.

ScoMo has not been a newly-elected Prime Minister of Australia for more than a few weeks and already he is being called upon to enact all sorts of policies to try to boost the economic growth of the country. And for sure he should do all he can to unlock the nation’s growth potential. But while the rest of the world slows, it would require a special kind of optimism to believe that Australia will somehow be immune.

This article was first published 13 June 2019.



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