Econ_Updates_Covers_Mar2018

Economic Update March 2018

March 2018

Alex Joiner, PhD

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Economic Update

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7 min

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Summary

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

Economic-Update-March-18-Chart

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%.

About the author

Chief Economist Alex Joiner, PhD

Joined in 2016

Bachelor of Economics (Hons) (Latrobe University), PhD (Econometrics) (Monash University). Alex is IFM Investors’ Chief Economist and has more than a decade of experience in the field. He is responsible for the firm’s economic, financial market and policy analysis and forecasting. Alex is also a member of the firm’s Investment Committee. Prior to joining IFM Investors, Alex was the Australian Chief Economist for Bank of America Merrill Lynch. In this role, Alex was responsible for providing economic insight and forecasts across asset classes and conveying these views to both domestic and global investors. Alex was also previously a Senior Economist at the ANZ Bank.