August 26, 2019

Australia Markets Weekly: Global risks intensify

The main domestic risk to the outlook is the uncertainty around consumer spending.

For the full picture, download the report – Australian Markets Weekly 26 August 2019

  • The main domestic risk to the outlook is the uncertainty around consumer spending, where sluggish growth reflects stagnant real incomes and falling real household wealth. Wage growth remains low and forward indicators point to rising unemployment, but there have been some positive developments, with lower interest rates and tax cuts likely to boost incomes, while a stabilisation in house prices removes a sizable drag on real wealth.
  • Internationally, though, the risks around the outlook have intensified given the escalation of the US-China trade war. Global growth has slowed as world trade and industrial production have contracted and uncertainty about policy has spiked. Business confidence has slumped in the advanced economies, which raises the risk that firms will defer investment and hiring plans, further slowing world growth.
  • Some central banks have started cutting rates and the market now expects almost every bank to cut rates over the coming months. Locally, NAB expects additional policy stimulus given that we think it will take longer for the economy to recover than the Reserve Bank anticipates and increased global risks reinforce our view on the need for action. We forecast an additional 25bp cut to the cash rate from the RBA by November, to 0.75%, alongside fiscal stimulus from the government. Increased global risks may demand more stimulus than we assume, while the RBA could end up shouldering more of the burden in supporting the economy given the Commonwealth is reluctant to abandon its surplus objective in the near term. Ultimately, though, the government has a major role to play given it has significant scope to support the economy with public debt low by both past and international standards.

The week ahead – The US-China trade war trumps the data; RBA speaker; key AU data

  • In Australia, RBA Deputy Governor Debelle speaks on the balance of payments on Tuesday, where he could discuss how low global interest rates reflect an excess of global saving. Key Q2 construction data are released on Wednesday with actual and expected business capital expenditure due Thursday. We forecast a fall of 1.2% in in Q2 in total work done (mkt: -1%), as residential construction continues to fall (-3%). We expect a 1% decline in actual business investment in Q2 (mkt: 0.4%) and a modest upgrade to firms’ plans. These data feed into Q2 GDP, released the following week, where NAB expects 0.5% growth in the quarter, underpinned by a 0.4ppt contribution from net exports. The RBA’s implied forecast is for 0.8% growth in the quarter.
  • Internationally, economic indicators will be overshadowed by the dramatic escalation of the US-China trade war over the weekend. US President Trump ordered US firms to leave China, then announced higher tariffs on Chinese imports. Trump said existing 25% tariffs on $US250 billion in imports from China would rise to 30% on 1 October, a further $US300 billion in Chinese goods will be taxed at 15% instead of 10% starting with the first tranche on 1 September, with the second batch of goods on 15 December.

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