Synchronised global growth no panacea for Australia

By Simson Sanaphay

• Australia's is approaching 26 years without recession, and with the global economy entering a growth phase that trend should be secure for years to come. But there are some clouds on the horizon that need careful observation. Citi expects all major western economies, with the exception of the United Kingdom, to do better this year over last. Australia is expected to sneak in with growth of 2 per cent this year, climbing to about trend of 2.75 per cent next year (real GDP rate).
• But the global economy is expected to do better, with growth of 3.1 per cent in the second half of this year and 3.3 per cent in the first half next year. Given that Australia avoided the worst of the Great Recession of 2009, and performed well in the years after as Europe and the US jumped from crisis to crisis, a bit of underperformance to the global economy is not a great concern. And yet there are some aspects of the Australian economy that are troubling. Quarterly labour data released in June showed that 86 per cent of strong employment gains in the previous three months had come from four sectors, health care and social assistance, accommodation and food services, professional services and transport - or to put it another way, hospital workers, baristas, app developers and Uber drivers.
• The issue is that these sectors tend to offer lower wages, and so it also partially answers the question on why Australia is experiencing such low wage growth. The exception is professional services, but most of those jobs are concentrated in NSW.
• Additionally, the three highest paid sectors, mining, utilities and finance, are still shedding jobs.

• As long as the four performing sectors continue to perform, the unemployment rate is unlikely to become a big enough issue to require an interest rate cut from the Reserve Bank of Australia.
• However, those sectors cannot continue to buoy employment figures indefinitely, and because the wages offered are lower, it will not give the inflationary pressure required to give the economy a boost.

• Add into the equation tightening lending standards, a rise in lending rates and data points that indicate heat coming off from the housing market - such as lower clearance rates, prices and finance commitments, and it all points to a sector in contraction.
• We don't think the tightening in lending standards will be temporary, and our bank analysts see mortgage credit growth slowing from 7 per cent currently to 4 per cent in the second half of the year.
• As the RBA Governor, Phillip Lowe, said in June, "there is a recalibration of expectations going on" as households come to grips with the combination of sustained low income growth, record household debt and house prices. The bottom line is a constrained outlook for households, which will keep the RBA patient and treading carefully despite the cautious optimism about the global economy.
  
  Simson is Citi's strategist