'Late to the party': Global growth is picking up, but Australia is at risk of being left behind

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Australia remains in the midst of a “consumption crunch”, as consumers navigate high household debt and rising energy costs amid low wage growth.

That’s one of the primary emerging themes from 2017 which Morgan Stanley says will remain as a key challenge next year.

The end result is that despite a positive global growth backdrop, the bank expects domestic growth to remain sluggish in 2018.

Here’s a summary of Morgan Stanley’s macroeconomic forecasts for 2018, outlined in a research note called “Late to the Party”:

“In contrast to most other developed market countries, we expect GDP growth to slow further in 2018, after an already weak 2017,” Morgan Stanley said.

That’s a considerably less optimistic outlook than the RBA. In it’s quarterly statement on monetary policy on November 10, the central bank kept its growth forecasts for next year at an average of 3% — double the rate of the Morgan Stanley prediction.

Morgan Stanley said growth will be constrained by the well-documented threats to domestic consumption — the key driver of economic growth which comprises around 60% of GDP.

The analysts said:

“The household sector is key to our negative view, as the consumer is being squeezed by record-low income growth (with average wages falling), increasing cost-of-living pressures and tighter credit conditions as regulators continue to crack down on mortgage lending.”

Aussie consumers are also dealing with rising cost pressures amid a broader cooling in house prices, as the impact of regulatory restrictions by APRA filter into the market by way of higher lending costs.

But the bank expects governments to provide “key support” for growth next year in the absence of consumption drivers, as state governments in NSW and Victoria continue to implement large-scale infrastructure projects.

Morgan Stanley’s leading indicator for housing indicates the market will continue to slow in 2018.

In considering its “bear case” for the Australian economy, Morgan Stanley also highlighted the risk that a sustained downturn could have a negative snowball effect on housing sentiment, leading to a significant price correction.

And while noting the strong growth in employment this year, from a broader economic perspective the analysts put more weight on stubbornly low wage growth.

Average income growth has fallen from a year ago, and the resulting headwinds to consumption will in fact weigh on the employment outlook, the bank said. As a result, it is forecasting unemployment to edge back to 6% in 2018 from its current level of 5.5%.

The net result from a monetary policy perspective is that Morgan Stanley expects the RBA to hold interest rates steady throughout the course of 2018, a view it’s maintained since April this year.

“The US Fed increasing its policy rate above the RBA for the first time in 18 years should drive a depreciation in AUD, which would support activity and inflation into 2019 and see the RBA tentatively beginning a tightening cycle in the second half of 2019,” it said.

The bank said such a scenario will still be dependent on the global growth picture remaining supportive. In view of that, it concluded the risks around the RBA’s next move on interest rates are skewed toward cuts, rather than hikes.

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