RBC Capital Markets economist Su-Ling Ong said the most significant threats to the global economy were an escalation in protectionism and further fracturing of the global trade framework, “weakening in the Chinese financial system, assertion of China in the region, and a no deal Brexit.”
Her assessment was shared by Industry Super’s Stephen Anthony who added the biggest volatility risks to the Australian economy through 2020 would be a major fall on Wall Street.
“[This could] trigger a global credit squeeze due to the high indebtedness of market darling stocks in the United States and across Asia,” he said.
AMP Capital’s Shane Oliver said he assumed that the threat of further economic damage from the trade war and the risk of that to President Donald Trump’s re-election campaign next year will drive the US and China to settle their trade differences.
“But this could yet again turn out to be wrong,” he said.
“This would see a further weakening in global growth, leading to reduced export earnings for Australia which would in turn boost unemployment risking another leg down in house prices.”
At home, the panel forecast unemployment to remain stable at 5.2 per cent by June next year, leading not one economist to believe wages are going to get back to their historic growth rate of between 3 and 4 per cent.
The panel forecast a wage price index average growth rate of 2.3 per cent, compared to 1.7 per cent for inflation.
Curtin University’s Rebecca Cassells said high levels of household debt would constrain spending even if wages do tick up.
‘Dead cat bounce’ for housing
That is despite a forecast stabilisation in house prices in Sydney and Melbourne, with most economists predicting both markets will bottom by June, before rising again.
Commonwealth Bank economist Kristina Clifton was more optimistic.
“The stabilisation in house prices will remove a major headwind for households,” she said.
“We expect house prices to stabilise in the second half of 2019 following Reserve Bank interest rate cuts, changes to serviceability metrics and the Coalition election win.
We expect lower interest rates, personal income tax cuts and a stabilisation in house prices will support household consumption in the second half of 2019. “
We expect house prices to stabilise in the second half of 2019 following Reserve Bank interest rate cuts, changes to serviceability metrics and the Coalition election win.
CBA economist Kristina Clifton
However, Mr Anthony, the most recent Scope forecaster of the year, said he believed home prices would continue to fall in 2019 and into 2020. Mr Anthony was among only two economists on the panel to correctly forecast the depth of the house price drop in 2018.
Mr Anthony said house prices would be down by 7 per cent in Sydney in the year to June 2020, and 12 per cent in Melbourne.
“We are experiencing a dead cat bounce in the Sydney and Melbourne residential property markets which is unlikely to be sustained as more new supply and new listings hit the market in spring,” he said.
Victoria University’s Janine Dixon doubted whether asset-rich homeowners will increase consumption if they don’t feel that their regular income has increased.
“While prospective new home buyers will feel the pinch when the dream of home-ownership again slips away,” she said.
The sombre outlook will push the central bank to cut rates again, with most economists predicting a fall to 0.75 per cent by December and another five expecting another drop to 0.5 per cent by June.
The unprecedented territory could force the Reserve Bank to consider quantitative easing – pushing more money into the economy – in the event of another economic shock, as conventional monetary policy is exhausted.
Ms Ong said it is likely that the discussion around alternative measures is already taking place behind closed doors at the RBA.
We think the RBA will inevitably be forced to engage in QE when another global shock hits, as it almost certainly will at some point in time
David Plank, ANZ head economist
“Given the resumption of policy easing globally and likelihood of limited policy traction from a lower cash rate, we think it likely that the RBA will need to adopt some alternative measures in the coming years tailored to Australian circumstances,” she said.
Mr Oliver said the low point for the cash rate was likely to be 0.5 per cent and that it was likely to be reached early next year.
“Beyond that point further rate cuts will lose their effectiveness as banks will struggle to pass them on to borrowers, so the focus will shift to other ways to boost the economy,” he said.
“This is likely to be focused on more fiscal easing [tax cuts] which should enable the RBA to avoid quantitative easing but it can’t be ruled out.”
ANZ head economist David Plank said quantitative easing seemed inevitable in the longer term.
“The usual response to a large negative shock to the economy is for the RBA to ease hundreds of basis points. This scope is no longer available,” he said. “We think the RBA will inevitably be forced to engage in QE when another global shock hits, as it almost certainly will at some point in time.”
The panel forecast a more than one-in-four chance of a recession by June next year, with Mr Anthony and the University of Western Australia’s Jacob Madsen putting the odds as high as 65 per cent.
Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.