The FSC spoke with Su-Lin Ong, RBC Capital Markets and Michael Thomas, Deloitte Access Economics on today's economic and market trends.
Q: What do you think is the key expected economic pressure point for the Coalition Government?
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Su-Lin Ong: The key pressure point will be on the evolution of the labour market over the next 12 months. Amid a much weaker starting point for growth, a likely persistent period of sub trend activity, the labour market looks likely to moderate further in H2 and into 2020. A weaker residential construction cycle, softer household consumption and structurally weaker manufacturing suggests pockets of likely labour shedding. Consistent with this softer labour market outlook will be the challenge of continued subdued wages growth. For the Government, these labour market dynamics will probably be key.
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Michael Thomas: The key pressure is the economy is slowing down. Forward indicators and low wages growth point to weakness in the labour market. House prices have not yet stabilised. Together this is weighing down consumer sentiment and spending.
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Q: When they come into play, what Royal Commission recommendations do you predict will have the biggest economic impact?
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Su-Lin Ong: For the banks, they will likely face a more challenging environment – reduction in other products (insurance, super, wealth management etc), tougher measures around financial advice, and tighter lending standards. Lending and activity likely to be less from this sector. Great product responsibility for all financial institutions under BEAR will likely add to costs too. Proposed changes to mortgage brokers is likely to result in reduced lending as well. While appropriate, and will ultimately contribute to a stronger and more transparent financial system, some likely moderation in lending and broader financial activity is occurring at a time when credit growth is anaemic and broader activity weak.
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Michael Thomas: The Royal Commission recommendations are not likely to have a significant impact on the current cycle. But, they will have longer term impacts, through increasing the regulatory burden, which will pushing up the costs of financial service in general. BEAR is likely to reduce executives willingness to take risks, which could spill over to innovation and productivity. The decision not to address vertical integration shows how hard it is to disentangle costs and benefits. Elsewhere, where ASIC ends up on responsible lending, will affect credit.
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Q: What current global economy influences should be on the radar for local financial services businesses?
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Su-Lin Ong: There are 3 key themes global themes.
1. Rising trade protectionism and the risk this poses to global trade and growth with transmission through to the Australian economy via commodity prices, trade, and more immediately, confidence.
2. Structurally lower wages and inflation which reflects a number of factors including automation, globalisation, weaker productivity and lower inflationary expectations. AU faces similar factors coupled with a labour market that has excess capacity. A prolonged period of lower wages growth and inflation look likely.
3. Central banks policy ammunition is limited, including the RBA. How much they can boost activity and inflation is constrained. Businesses, including financial services, need to focus on productivity measures to lift output and profitability.
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Michael Thomas: Anything that effects the exchange rates and local interest rates! Specifically, China – the storm around Huawei is symptomatic of a much bigger issue, the long-term competition between China and US. Also trade in general, plus cyber crime.
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