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Economic overview: December quarter 2018

​​Kirk Zammit

Economic growth in Australia's main export markets remains strong, but downside risks have increased. 

  • Global economic growth has been revised down by 0.2 percentage points from 3.9% to 3.7% in 2018 and 2019.
  • The Australian dollar is assumed to average US72 cents in 2018–19, 7% lower than in 2017–18.

Global economic outlook

Global growth assumptions have been revised down from Agricultural commodities: September quarter 2018 to be 3.7% in 2018 and 2019. This is largely due to lower economic growth prospects in emerging and developing economies.

Downward revisions to growth assumptions in Eastern Europe, Latin America and the Middle East are due to factors such as armed conflict, drought, political unrest and tightening financial conditions. Economic growth in South-East Asia has also been lowered for 2019 because of tighter financial market conditions and the dampening effect this is likely to have on demand in the region.

Economic growth assumptions for China remain unchanged. The Chinese economy slowed slightly over the first 3 quarters of 2018 but remains in line with the Chinese Government's growth target of 6.5% for the year. However, balancing growth and maintaining financial stability in China will be more difficult following the US Government's decision in September to increase US tariffs on imports of Chinese goods.

Growth assumptions for advanced economies are largely unchanged. The US economy continued to accelerate in the September quarter 2018, and monetary policy normalisation is expected to continue in 2019. However, economic growth in the euro area has been revised down, in line with weaker than expected trade and investment growth in the June and September quarters.

The prospect of stronger than expected global growth has largely diminished because of the increase in downside risks throughout the year. These include escalating trade tensions between the United States and China, and increasing volatility in global financial markets because of increased trade, political and policy uncertainty.

Economic policy uncertainty, January 2016 to October 2018
Global trade volumes and industrial production continued to grow in the first half of 2018. Global trade volumes increased by 3.7% year-on-year in June 2018. Industrial production increased by 3.6% over the same period.

Note: Mean of indexes are January 1997 to October 2018=100.
Sources: www.policyuncertainty.com; International Monetary Fund

Trade tensions and emerging market vulnerability

In September 2018 trade tensions between the United States and China increased further when the United States levied 10% tariffs on US$200 billion of imports from China. These tariffs could be raised to 25% in early 2019 if China and the United States cannot reach agreement on issues such as technology transfer and intellectual property protection. China retaliated to the latest round of US tariffs by imposing 10% tariffs on US$60 billion of imports from the United States. The US President has previously threatened to impose tariffs on all US imports of Chinese goods, equivalent to an additional US$267 billion of trade.

Increasing trade barriers and associated policy uncertainty are likely to dampen global growth in 2018 and 2019 by increasing the cost of trade, disrupting regional production networks and deferring investment. In its October World economic outlook, the International Monetary Fund (IMF) projected that tariffs imposed since the beginning of 2018 would reduce global growth by 0.1 percentage points from the IMF's baseline. The IMF estimates that this would roughly double if the US Government went ahead with additional tariffs in 2019.

The escalation in the trade dispute between China and the United States, and more broadly the build-up in policy and trade uncertainty, have led to increased risk aversion in global financial markets. As a result capital outflow from emerging markets has increased, further weakening those currencies relative to the US dollar. This is expected to dampen investment and household income growth in some countries. Economic growth in Eastern Europe and Latin America has been revised down. This is partly due to the challenging financial conditions in Turkey and Argentina.

Countries in South-East Asia continue to fare better than other emerging and developing economies because of generally stronger institutions and economic fundamentals, and lower exposure to US dollar denominated debt. However, the possibility of worsening trade relationships, or a sharp increase in interest rates and oil prices, could abruptly change the outlook for emerging Asia.

Change in emerging market currencies against the US dollar, January 2018 to November 2018
Over the first 9 months of 2018, Argentina’s currency depreciated by 47% and Turkey’s by 30%. Currencies of Asian countries depreciated by much less. Indonesia's currency depreciated by 9% and China's by 7%.

Sources: Bank for International Settlements; Federal Reserve Bank of St Louis

Strong growth in Australian agricultural export markets

The downward revisions to economic growth are principally for countries and regions that are not major markets for Australian agriculture. However, the more volatile and uncertain trade and financial conditions have increased the downside risks to economic growth for many Asian countries important to Australian agricultural exporters. For example, a decline in consumer confidence in China, Japan and Korea in recent months may be a precursor of weakening demand.

Despite increased downside risks, growth prospects for Australia's 10 largest agricultural export markets are assumed to remain favourable in the short term, with an average growth of 4.5% in 2018 and 4.3% in 2019. This is virtually unchanged from the September quarter 2018 and is in contrast to the downward revision to global economic growth.

Australian economy

The Australian economy increased by 2.8% year-on-year in the September quarter 2018. Economic growth was driven by strong growth in household consumption, elevated public sector investment and strong growth in the volume of exports, which increased by 4.1% year-on-year in the September quarter 2018. Australian exports have been supported by strong demand, particularly in Asia.

The outlook for nominal economic growth has also improved over 2018. Australian export prices remain favourable, particularly because of strong demand in China for iron ore and coal. Prices received for Australian agricultural exports have supported returns to the rural sector due to strong demand from Asia and lower global supplies of grain. The depreciation of the Australian dollar over recent months has provided an additional boost to exporter returns. These developments have helped keep Australia's terms of trade elevated and have provided a boost to national income.

Uncertainties to the outlook for Australia's economic growth are unchanged since the September quarter 2018.

Australian dollar assumed to decline by 7% in 2018–19

In 2018–19 the Australian dollar is assumed to average US72 cents and have a trade-weighted value of 62.5. This is a downward revision from the September quarter 2018. The Australian dollar has been further weakened by greater risk aversion in financial markets and increased interest rates in the United States and other advanced economies. However, the relatively positive outlook for Australian income growth is likely to provide some upside for the Australian dollar in 2018–19.

Australian dollar trade weighted index and exchange rate, daily, May 2016 to November 2018
The amount of sovereign and private debt held by foreign investors, relative to the size of the economy is generally lower in emerging Asian countries, compared with other emerging countries. Malaysia and Sri Lanka are the main exceptions.

Source: Reserve Bank of Australia

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Last reviewed:
11 Dec 2018