We started 2020 on an optimistic note. Two issues impacted global growth and confidence in 2019, the US China trade war and Brexit. The signing of the phase one trade agreement between the US and China on January 15th and the UK election outcome signalling an end to the Brexit impasse has provided a long overdue confidence boost to the global economy and greater consensus around the forecast for stronger global growth in 2020.
Domestically several economic and consumer focussed indicators surprised on the upside in November and December providing additional evidence that our economy is also starting to recover from the soft patch in the second half of calendar 2019. The December employment data released on January 23rd was above expectations. The economy created 28,900 jobs in December on top of the revised November figure of 38,500 and the unemployment rate fell from 5.2% to 5.1%. After rising through much of 2019 the unemployment rate is now clearly trending downward again as highlighted in the chart below from the Australian Bureau of Statistics.
The resilience of the employment data both domestically and internationally observed in much of our commentary last year was the main positive tailwind against the economic slowdown, geopolitical tensions and general volatility in 2019. This appears set to continue.
The Aussie November retail sales data also surprised to the upside indicating consumer spending may well be coming out of hibernation. The Black Friday sales lifted retail turnover by 0.9% in November up from 0.1% in October. Several indicators also point to a continued strengthening in the housing market. Dwelling approvals for both houses and apartments bounced strongly in November after a two-year decline with seasonably adjusted dwelling approvals up by 11.8%. Housing finance also rebounded strongly in November with both investors and owner occupiers returning to the market. House prices have stabilised nationally and our now trending upwards in the main Melbourne and Sydney markets. This along with very strong superannuation returns in calendar 2019 is supporting renewed consumer confidence and the potential for increased spending from the so called ‘wealth effect.’
Conversely, the last NAB business confidence survey for 2019 (Dec) released on January 28th ended the year at a six-year low after trending downwards for most of the year. Businesses may be employing but forward orders and capacity utilisation are still below average and not strong enough to be generating any turnaround in business investment. That said the survey did indicate that business activity stabilised in the final quarter of 2019 and the capital expenditure outlook particularly for our mining sector looks positive. Our export sector (resources and energy) remains the standout. In sharp contrast to the rest of the world the trade war did not impact our export sector. The September quarter Balance of Payments data released on December 3rd showed Australia recorded its largest ever quarterly goods and services surplus (ie the value of exports less imports) at $21.1billion. This is the first time in 46 years we have recorded consecutive current account surpluses. Our terms of trade (the prices we get for our exports vs the prices we pay for imports) also continued to strengthen providing a boost to our national income. Strong international demand for our minerals and energy and a lack of investment in new capacity since the GFC is supporting stronger for longer commodity prices. Provided the global economy continues to improve this should continue.
All the above indicators and surveys were taken in November and December 2019 before the bush fires and the outbreak of the coronavirus in China. Both factors are impacting regional economies and particularly our tourism sector which now accounts for some 7-8% of employment. The coronavirus is one of those highly unpredictable ‘black swan’ events that if not contained could derail global growth forecasts for 2020. It is a major risk factor for Australia given China is our largest trading partner accounting for over 30 % of our exports. This includes both goods (mostly commodities) and services such as education and tourism.
The Chinese economy already weakened by the trade war is struggling to meet its GDP growth targets and any prolonged shut down of major centres adds further risks to what is now a highly levered economy. It will also impact business and consumer confidence and possibly reignite the protests in Hong Kong. That said the Chinese government remains committed to doing whatever it takes to keep GDP growth in line with or above their target economic growth of 6% per annum and based on past history, economic stimulus across a range of fiscal and monetary policies is likely to be applied accordingly.
Investment markets initially rallied post the US-China trade deal with the S&P 500 (USA) and our market reaching record highs in mid-January. Markets were also buoyed by the prospect of stronger economic and in turn earnings growth. As outlined in the December update the disconnect between earnings growth and share price growth accelerated in calendar 2019 fuelled in large part by the deterioration in global growth and the corresponding race to the bottom on interest rates by central banks. With valuations now stretched markets remains vulnerable to a correction.
Assuming the coronavirus is quickly contained, and economic conditions do improve domestically and globally the greatest risk to investment returns in 2020 across equities, property and bonds is likely to be a bottoming and stabilisation in the interest rate cycle and potentially the start of rising rates. In the USA on January 29th the Federal Reserve left interest rates on hold citing the strong labour market and consistent growth in consumer spending. In Australia the Reserve Bank also left rates on hold post the strong December employment data and a slight uptick in inflation for the December quarter. The re acceleration in property prices in the Sydney and Melbourne residential market is something the Reserve Bank will be watching carefully and something that could also impact future interest rate decisions. In these markets residential property is now the most expensive in the world after Hong Kong and Vancouver and could quickly enter bubble territory.
On balance our view on the economy this month is more
optimistic. The resolution as least in
part of the trade war and Brexit and renewed strengthening in employment
globally and domestically suggests the possibility of a recession scenario in
the short term has significantly decreased. Again, this assumes the coronavirus is quickly
contained and no other black, green or any other coloured ‘swans’ emerge.
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Sources: Commbank Global Markets Research, RBA, Morningstar.