A recent report from CommSec highlights some of the big economic issues likely to be in the spotlight next year, singling out in particular:
- Tax reform in the US
- Inflation and unemployment
- Housing market and infrastructure
Current economic conditions
The report says things in the Australian economy generally went to plan in 2017, with underlying inflation remaining between 1.5-2%, unemployment between 5.25-5.75% and the official cash rate staying at 1.5%.
“Both the Aussie dollar and the share market are ending the year well within the forecast bands,” says Craig James, chief economist at CommSec.
“The share market may finish near the top of the forecast band while the Aussie dollar is currently trading near the middle of the US73-79 cent trading band.”
Tax reform in the US
The US Senate recently approved the Republicans’ tax bill designed to reduce the rate of tax on several groups, including businesses, with the aim of stimulating the US economy. In 2018, the Senate and the House of Representatives will need to agree on the specific details.
“The goal of the Trump administration is to lift the pace of economic growth to the 3-4 per cent range rather than 2-3 per cent range. And the tax cut package is seen to be one of the mechanisms that could serve to lift sustainable economic growth,” says James.
“The belief is that lower tax rates – especially for business – will serve to stimulate the economy, thus boosting business revenues and profits. And at the same time, the belief is that lower taxes will reduce business costs and again lift revenues and profits. But as is always the case in economics, there are many who question whether tax cuts will provide the desired benefits.”
James adds that countries like Australia may follow the US’ lead when deciding on tax legislation in the future.
Inflation & unemployment
Inflation in Australia has remained low this year, with CommSec forecasting it could remain at 2% over the next two years. At the same time, economic growth rates have lifted and unemployment is at a four-and-a-half year low.
Inflation is also low globally and economic growth is positive, leading CommSec to question whether inflation is at an inflection point. James says the Reserve Bank of Australia is working on the belief that inflation in Australia has bottomed and so is unlikely to lower the official cash rate.
“How long inflation stays low will certainly be debated this year. But we could continue to discuss the issue in 2019, given the track record of recent years,” he says.
Property market & infrastructure
The property market and its anticipated slowdown continues to be a big point of conversation. The CommSec report highlights that the Sydney housing market softened in 2017 due to cooling demand and the completion of more homes. However, strong population growth in both Sydney and Melbourne is helping to reduce the impact of any prospective slowdown.
“We expect that growth of home prices will soften in 2018 with more new homes completed and coming onto the market,” says James.
Across the country, James predicts Hobart and Canberra will remain healthy, while Adelaide and Brisbane will stay steady, and Perth and Darwin will continue to correct following the end of the mining and energy construction booms.
Another issue identified in the report is how work on infrastructure will impact business spending and employment.
“Across Australia, state, territory and federal governments have announced a raft of projects in recent years. Some of those projects have already started with years of construction ahead. And some projects have only just started or are about to start,” James says.
Deloitte Access Economics estimates the value of road and rail projects will lift from $4bn in 2015 to a peak of around $16bn in 2020.
The other issues
CommSec’s report also mentions the prospect of rising debt levels among Australian homeowners should there be a rise in interest rates and a slowdown in the rate of growth of the Chinese economy.