Economic Outlook Summer 2018

Trade wars continued to be a theme during the September 2018 quarter as tensions between the US and China escalated. In July, the US and China levied tariffs of 25% on $34 billion of each other’s exports. This means consumers in the US and China now pay 25% more to buy tariff-affected products from each other.

International economy – US and China trade update

In September 2018, the US imposed 10% tariffs on $200 billion of Chinese goods. China responded by imposing 10% tariffs on $60 billion of US goods. The US said that the current 10% tariffs imposed on China will become 25% tariffs by January 2019. China has promised to do the same.

These trade wars have reduced manufacturing activity around the world, apart from the US, since December 2017. Confidence across manufacturing has been affected by the uncertainty surrounding trade policy and this has translated into lower business investment.

To soften the blow of the trade war, the US and China have used government spending to assist those sections of the economy that have been affected.

The outlook does not appear optimistic as neither the US or China appear willing to compromise because they will sacrifice too much domestic political goodwill by being the first to compromise. The most likely outcome is that new tariffs will lower future economic growth by restricting trade, but this will be offset to some degree by greater government spending.

The worst-case scenario for an escalating global trade war that spills out beyond the US and China appears to have been avoided.

Australian economy – property update

In Australia, property markets were keenly watched during the September quarter as national house prices fell 2.7% over the last 12 months. This decline was led by previous market leaders, Sydney and Melbourne, which dropped 6.1% and 3.4% respectively over the period.

What has prompted the decline in property prices?

There are several reasons for the decline in house prices, with the major factor being higher mortgage rates. ANZ, Westpac and the Commonwealth Bank of Australia (CBA) and some smaller banks all increased interest rates during the September 2018 quarter.

Lending standards have also been tightened in response to both the regulator, the Australian Prudential Regulation Authority (APRA), and in anticipation of changes forthcoming from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. This tightening of standards has made it more difficult for people to get a home loan. The reduction in borrowing means there is less money to sustain continued growth in house prices.

An excess in the supply of new apartments and softer immigration numbers has affected unit prices in the important markets of Sydney, Melbourne and Brisbane.

What is the outlook?

The decline in housing financing coupled with weak income growth and tight lending standards will likely continue to act as headwinds for house prices going forward.

Also, if a global economic shock leads to higher unemployment in Australia this could trigger loan defaults and foreclosures. This would further exacerbate price declines.

However, if immigration continues at strong levels or wage growth improves, households may be able to bid up house prices once more. This is unlikely to eventuate as wage growth remains subdued. Also, immigration growth may be curtailed in the future given the populist trend to reduce immigration being seen in politics at the State and Federal level.

Source: IOOF

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