Economic Update March 2018
IFM Investors Economic Update
The US economic outlook is of key interest to investors globally as it drives the underlying prospects for financial markets. It is becoming apparent that near-term optimism on the economy is increasingly being tempered by medium term
caution. And the question often now being asked is: how long can the US economy continue to underpin equity market returns and the credit cycle, largely at the expense of sovereign fixed income?
Markets have very much come to the conclusion that 2018 will be another year of solid, if not strong, growth of the US economy. This is no surprise given the front-loaded impact, in the next two years, of both household and corporate tax
cuts and the US administration’s budget spending deal. That is, aggressive fiscal stimulus in a recovering economy in which there is still monetary accommodation and relatively easy financial conditions. Economists are expecting
the household and business tax cuts to add on average 0.25pp to real GDP growth in 2018 and 2019. On top of this the Budget deal will contribute as much as 0.2pp in each of those years. This has pushed consensus forecasts of real GDP
growth to 2.7% and 2.4% for 2018 and 2019, increasing from 2.3% and 2.0%, respectively, in forecasts made in October 2017. These expectations are even further above estimates of potential growth, at around 1.75%, and will consequently
push the unemployment rate even further below full employment.
US: Real GDP growth
Economic growth to run above potential but not above average
Source: IFM Investors, Bloomberg, BEA
The risk of a direct impact on the Australian economy from an exogenous source will come largely from any material slowdown in the Chinese economy rather than the US (which will clearly have an indirect impact). As is well known, the Australian
economy is exposed to China like no other. In 2016-17 China accounted for 23.7% of twoway trade more than the next three countries combined – Japan (9.3%), Korea (5.3%) and the US (9.0%). What is less well known, however, is
that it is not just key resources exports but services that define Australia’s exposure. China was Australia’s top goods exports destination by far in 2016-17, accounting for 32.8% of our export trade (or 37.2% if Hong
Kong is included). Japan is a distant second, taking 14.5%. Yet China is also our top services export destination by far, accounting for 18.0% of this trade. In this category, the US is second at 10.4%.