Economic overview: September quarter 2019
Matthew Howden and Kirk Zammit
- Elevated uncertainty is weighing on the global economic outlook.
- The Australian dollar is assumed to depreciate by 5% to average US68 cents in 2019–20.
Global economic outlook
Global economic growth is assumed to be 3.2% in 2019 and 3.5% in 2020. Economic growth in both years has been revised down by 0.1 percentage points since Agricultural commodities: June quarter 2019.
Downside risks to global economic growth have increased, largely due to growing uncertainty about global economic policy. An escalation in the trade dispute between China and the United States, political unrest in Hong Kong and rising trade and political tensions between Japan and the Republic of Korea have further weighed on the outlook for 2019 and 2020, particularly for Asia—Australia's largest export market.
The growing uncertainty about economic policy could spark a broader downturn in the real economy and ultimately affect household incomes—an important determinant of agricultural import demand in developing economies. However, strong population growth is likely to maintain demand for Australian agricultural goods.
The transmission of increased uncertainty to the real economy is usually through lower trade and investment. Indicators of business confidence have continued to decline, and export and industrial production indicators remain subdued in many markets, including those in South-East Asia.
Despite the worsening external conditions, domestic demand in a number of Australia's major export markets has remained relatively robust. In the United States, Japan, New Zealand and the United Kingdom, employment has continued to grow strongly and unemployment rates are lower than they have been in decades. Consumption in South-East Asia, particularly in less trade exposed countries, such as Indonesia and the Philippines, has also remained resilient.
Central banks have eased monetary policy in response to the uncertain outlook, with the US Federal Reserve lowering its federal funds rate to a midpoint of 2.125 in July. This has given developing economies, including those in Asia, room to ease monetary policy to support economic growth.
Economic developments in agricultural export markets
Economic growth in China is assumed to be 6.2% in 2019. This is close to the mid-point of the National People's Congress growth target. In response to the escalating China–US trade dispute, ABARES has revised growth in 2020 down by 0.2 percentage points to 6% from the Agricultural commodities: June quarter 2019 assumption.
The China–US trade dispute began in 2018. Tensions escalated further in August when the United States announced it would impose tariffs of 15% on an additional US$300 billion of Chinese exports (largely consumer goods). The tariffs were scheduled to come into effect in September and December 2019. China retaliated by instructing its state-owned enterprises not to buy agricultural goods from the United States, and is imposing further tariffs on US$75 billion of US imports (see Agricultural overview for details).
The renminbi depreciated following the recent escalation, moving above 7 per US dollar for the first time in a decade. The renminbi has depreciated by about 9% against the US dollar since the trade dispute began in 2018. This devaluation will help Chinese export competitiveness and offset the impact of the US tariff increase.
The China–US trade dispute is affecting exports and business investment in East Asia because many countries in the region are highly integrated in global supply chains. Of concern to Australia is the deceleration in consumption growth in year-on-year terms in some of its largest agricultural export markets, including South Korea, Hong Kong, Singapore, Taiwan, Thailand and Malaysia. However, domestic economic conditions remain reasonably robust in the less trade-exposed economies of Indonesia and the Philippines, and in Vietnam, which has benefited from a diversion in trade from China.
Economic growth in India has been revised down since the Agricultural commodities: June quarter 2019, from 7.5% to 6.5% in 2019, and 7.8% to 7.1% in 2020. Lower investment, fiscal spending and trade tensions with the United States are weighing on growth. Agricultural exports to India remain heavily constrained by import tariffs and quotas.
Income growth, measured by GDP per person, is a driver of import demand. Income growth in emerging Asia has been revised down for 2019 and 2020. This is due to revisions to economic growth in China and India. However, income growth assumptions remain favourable for Australia's major export markets.
The Australian economy grew by 1.9% in 2018–19, and is assumed to grow by 2.8% in 2019–20, supported by interest rate and tax cuts. The Australian dollar is assumed to depreciate by 5% to average US68 cents in 2019–20.
As at the September quarter 2019 economic growth in Australia has been little affected by China–US trade tensions. This is because Australia is not significantly involved in affected global supply chains. Actions by Chinese authorities to stimulate the domestic economy have increased exports from Australia, providing a boost to national income.
Australian export prices increased sharply in 2018–19, mostly because of strong demand from China for iron ore and coal, and to a lesser extent agricultural produce. Australia's terms of trade increased by 6% in 2018–19. High prices for Australian exports have, until mid-2019, supported the Australian dollar.
The Reserve Bank of Australia cut interest rates by a total of 0.5 percentage points in June and July. These cuts come at a time when government bond yields have declined in other major advanced economies such as the United States. The cuts are likely to have dampened downward pressure on the Australian dollar.
Financial markets have reacted sharply in recent months to negative news about the China–US trade war. The increased uncertainty has led to increased demand for safe-haven assets such as US and Japanese government bonds, putting downward pressure on the Australian dollar and other 'risk currencies'—including those of major agricultural exporters. Ongoing concerns over global economic growth in financial markets and potential for further flare-ups in trade disputes are likely to continue to have a strong downward influence on the Australian dollar.
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