Risks facing Australian economy in 2020

Risks facing Australian economy in 2020

KEY RISKS FOR THE AUSTRALIAN ECONOMY IN 2020

The Australian economy posted its worst performance since the global financial crisis during 2019, hit by drought, weak consumer spending, sluggish business investment and a slowing global economy. As of the September quarter, annual growth was running at 1.7 per cent, well below the long-term trend at 2.75 per cent. Treasurer Josh Frydenberg was forced to cut his 2019/20 growth forecast to 2.25 per cent. While economists are expecting a gradual grind higher during 2020, the recovery may not be fast enough to prevent unemployment rising.

After dipping to a nine-year low of 4.9 per cent early in 2019, the jobless rate has gradually increased to 5.3 per cent. Treasurer Frydenberg now expects the unemployment rate will be 5.5 per cent this financial year and next. The Reserve Bank wants to see it closer to 4.5 per cent to help lift sluggish wages growth. But a slump in job advertising over the past year and slow economic growth suggest the unemployment rate could go even higher.

The Reserve Bank cut the cash rate three times during 2019 to record low 0.75 per cent and appears ready to take further action in the new year. RBA governor Philip Lowe has flagged that once the cash rate reaches 0.25 per cent, unconventional forms of monetary policy will be considered if there isn’t a drop in the jobless rate and inflation remains below target. This could come through quantitative easing, where the central bank buys government bonds and other securities to pump money into the economy.

Interest rate cuts and reductions to personal income taxes have failed to lift the mood of consumers, who appear more content in paying down debt and saving rather than spending the increase to household incomes. Business confidence is also weak as business conditions struggle below average, raising the risk of slowing employment growth and continuous sluggish business investment.

Global financial markets look set to end 2019 on a positive note having received an 11th-hour lift from the first phase of a US-China trade agreement and the likelihood of Britain finally leaving the European Union early next year following the UK election to end on a positive note. The trade wars between the world’s two biggest economies and Brexit have been key factors behind repeated global economic growth downgrades by the IMF and OECD.

Josh Frydenberg was on course to be the first treasurer since Peter Costello 12 years ago to return a budget surplus. But he and Prime Minister Scott Morrison have abandoned this in response to the bushfire crisis. The federal government has committed $2 billion towards a recovery fund, which is not enough in itself to send the budget into deficit. However, the government cannot quantify the bushfires’ overall impact on the economy. The blazes are expected to affect consumption, economic growth and tourism numbers. The bushfires have also dealt a cruel blow to the farming sector, which has already been crippled by drought.

Global credit rating agency Standard & Poor’s confirmed Australia’s AAA rating following the mid-year budget review. But it has previously warned the rating would be at risk if the government is forced to significantly boost spending to stimulate the economy and change the trajectory of the budget. A downgrade would result in banks paying more for funding in overseas markets and potentially forcing them to raise interest rates at the worst time for the economy. It would also be a big hit to confidence and for the government.

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