Pragmatism, pendulums & perspective
RICHARD YETSENGA, CHIEF ECONOMIST, ANZ | FEBRUARY 2019
You would be forgiven for feeling confused by markets as we move through the early stages of 2019. Asian equities have risen and Asian currencies also. But global equity and credit markets have been very volatile and the Australian bond market is now clamouring for a rate cut. Some perspective is required.
The year 2018 closed with twin external challenges for Asia; the fed’s tightening program and trade tensions. The threat from the first has substantially lessened.
We still have one more hike from the US Federal Reserve on our forecasts but what is still a modest inflation cycle supports the Fed’s more pragmatic reaction function. In many ways we have confirmation the end of the Fed’s hiking cycle is within view. That is an important improvement in the landscape.
“The over-ebullience of early 2018… has been replaced by over-pessimism as the pendulum has swung the other way.”
Sentiment around global trade remains quite negative despite the apparently improved tone of US/China trade talks in 2019. This is a bit puzzling. Certainly the global trade cycle has continued to slow but it’s difficult to claim it is a direct result of trade tensions.
If it was due to trade tensions then countries directly affected would have clearly the weakest exports. And yet the weakness has been spread across a number of countries including Korea, Taiwan and even Germany.
Secondly, for China itself exports to the US should have weakened much more than exports to other regions. The reality is exports to all destinations have weakened, suggesting a more broad-based driver.
Finally, the tariffs just don’t seem to be of a scale they can singularly account for the slowdown we have seen. China exports $US2.5 trillion a year and the US has only put 10 per cent tariffs on $US250 billion of those exports. In fact all the tariffs to date, from all countries, account for less than 4 per cent of global trade.
It seems more likely the over-ebullience of early 2018, when many were convinced of a synchronised global upswing, has been replaced by over-pessimism as the pendulum has swung the other way.
Certainly last year’s very strong sentiment indicators substantially overshot the hard numbers which more accurately reflect the underlying state of growth. And yet the current weak survey numbers seem to be guiding much of the sentiment at present.
ANZ Research expects Asia ex-Japan to grow at 5.5 per cent in 2019 and 5.7 per cent in 2020. While these are both weaker than 2018’s 5.9 per cent outcome the weakness is only modest.
Within the region, the main challenge has come from China. Growth has continued to slow despite gradual policy easings from the authorities over the course of 2018.
Certainly China’s easing has been less than aggressive, suggesting structural deleveraging objectives continue to constrain the policy response. Policy is being eased sufficiently, however, to ensure the slowdown remains modest and orderly.
Given China’s structural challenges, a slowdown should be our base expectation in any case. ANZ Research forecasts embody growth to slip gradually, with an expected outcome of 6.3 per cent in 2019 and 6.1 per cent in 2020. Despite this, China will still make by far the largest contribution of any country to global growth.
Within this regional context Australia is dealing with a defining adjustment in the housing sector. Outside of that the economy is doing well.
Commodity prices are high, the federal budget is back to surplus for the first time in a decade, infrastructure spend will remain strong into 2020 and moderate business investment growth is expected to continue.
The most cited concern is weakness in house prices - which ANZ Research expects to continue for at least the first half of the year - and whether it will derail the positive non-housing story. ANZ Research doesn’t think it will; with prudential policy being appropriately responsive to the balance of risks.
Typically when house prices are falling there is plenty else going wrong; either domestically or globally. While there are issues to worry about at present, most countries continue to record reasonable growth.
There are also plenty of winners from this house-price decline, as those previously priced out of the market take advantage of better prices.
Typically falling house prices are driven by tighter monetary policy, which has a broad impact. On this occasion the downturn has been driven by tighter prudential policy, which has a narrow impact.
Provided prudential standards are correctly calibrated for the tightening in bottom-up standards, forced sellers in the housing market are unlikely to turn what really has been a textbook adjustment so far, into something much worse. ANZ Research forecasts GDP growth this year at 2.8 per cent, down modestly from 3.0 per cent in 2018.
The year 2019 is beginning as a year of confusion tinged with fear. It is likely to turn out to be a year of transition; one away from exports as a driver of growth towards domestic demand and in Australia, the beginning of a structural transition away from housing.
Transitions can be bumpy. But these bumps will be modest.
Richard Yetsenga is Chief Economist at ANZ
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