Australian households could face rate hikes within two years — but only if wages growth picks up — according to the OECD’s latest economic outlook, which warns its projections of a global slowdown could prove even worse if US-China trade tensions escalate.
The report projects Australia’s economic growth will slow, from 3.1 per cent this year to 2.9 per cent next year, and 2.6 per cent by 2020.
It also predicts slower global growth due to greater uncertainty and instability, in particular the US-China trade war.
Global economic growth, the report projects, will decline from 3.7 per cent now to 3.5 per cent in 2019 and 2020.
Despite subdued growth, wages will pick up and Australia’s unemployment rate will fall. This will result in “monetary policy tightening” — in other words, rate rises — within two years, the report said.
As house prices continue to fall across major capital cities and finances tighten, Australians will cut back spending. In this environment, “high indebtedness of households remains a risk”.
Wages growth should accelerate
The report suggests a dramatic slowdown in China and/or a sharp correction in house prices could reduce household wealth and consumption and impact on the construction sector.
Asked whether higher interest rates would just further exacerbate the downturn, OECD chief economist Laurence Boone said the organisation was only advocating rate changes if the Australian economy could withstand it.
“The Australian economy is doing well,” she told ABC News.
“It’s slowing down but it’s doing well and we are certainly not calling for monetary policy to exacerbate the slowdown.
“We think that over the next two years — as the course of wages and prices actually start accelerating — then monetary policy should react appropriately and timely to that.”
The Reserve Bank of Australia cash rate is currently at 1.5 per cent.
US-China trade tariffs to dent global growth
The report singles out two main factors causing instability: US-China trade tensions — which have been inflamed under US President Donald Trump — and geopolitical uncertainty.
“Increased trade tensions and uncertainty about trade policies remain a significant source of downside risk to global investment, jobs and living standards,” the report said.
Growth in the United States is projected to slow from close to 3 per cent now, to just over 2 per cent in 2020. And China’s current growth rate is expected to ease slowly to 6 per cent by 2020.
But the report suggests “adverse effects from tariffs would rise considerably” if the United States raises the tariffs on $200 billion of merchandise imports from China to 25 per cent in January next year, with retaliatory action taken by China.
This would almost double the impact on GDP in the United States and China by 2020 and 2021, with world trade declining by more than 0.6 per cent, the report said.
In such a precarious trade environment, global policy makers need to be on standby and ready to act.
Call for world leaders to restore ‘confidence’
Since interest rates are already low in advanced economies like the United States, there is limited scope to use monetary policy to act. This means governments will have to roll out fiscal stimulus.
Ms Boone, formerly chief economist for global insurer AXA and a senior economic adviser to former French president Francois Hollande, said it was time for governments to “restore confidence and cooperation”.
“It means first sitting at the negotiation table, within the international rules-based system, to actually discuss tariff and non-tariff measures for trade,” she said.
“It also means discussing and working on possible fiscal cooperation if a downturn was to be more severe than what we project.
“The G20 did it for monetary policy in 2009; they can do it again for fiscal policy if a downturn materialises over the next two years.”
Time to act on inequality
The report said recovery since the global financial crisis had not led to tangible improvements in the standard of living for many people, and that had fuelled citizen discontent.
Ms Boone said globalisation and digitalisation, while reaping benefits for many and lifting millions out of poverty, was also increasing inequality.
“But also, and especially in advanced economies, they have created winners and losers and we haven’t paid enough attention to those who haven’t won,” she said.
“We need now to refocus policy on this, and that means raising skills, that means targeting social spending to the less well-off.
“It also means looking at firms — a small portion of firms — who are reaping a lot of the benefit of digitalisation, without, perhaps, sharing that well enough with workers.”
In an Australian context, the report suggests that while efforts to bring the federal budget back to surplus are important, “the priority on combating socio-economic exclusion — for instance through education reform and improved support for job-seekers — should be maintained”.
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