Stimulating Economic Growth: A Key Challenge for Australian and Global Economies

  • Dec 08, 2019 AEDT
  • Team Kalkine
Stimulating Economic Growth: A Key Challenge for Australian and Global Economies

The year 2020 is impending with a thundering noise as several disruptive forces are sweeping across the global economy, exerting downward pressure on growth that has already suffered considerably in 2019, primarily due to a slowdown in China, trade dispute, prevailing Brexit issue and difficulties in Eurozone manufacturing.

With just a few days left for 2020, the leading market experts and economists have started providing the global growth forecasts for the approaching year. ?A majority of experts are anticipating a pick-up in global growth during the second half of 2020, which is likely to continue in 2021. These expectations stand on the likelihood of easing trade tensions between the two largest economies of the world and the effect of central banks? monetary policies.

Though the experts expect the effect of the US-China trade war to carry on into 2020, impacting the global economic growth in the early half of 2020, they anticipate a revival in the later half. They believe that the effect of monetary policy stimulus will be visible in the second half of the next year.

The projections provided by the market experts are slightly higher than the recent forecasts of the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD), that downgraded the global growth estimates for 2020 and 2021.

Easing Trade Tensions to Revive Global Economic Growth, Say Economists

The experts? forecasts of stabilisation in the global economy in 2020 is particularly driven by fresh optimism in the US-China trade talks. As per recent reports, the US and China are moving with full pace to ensure the signing of a partial trade deal and are likely to sign a deal before the scheduled tariff rise on 15th December 2019.

Moreover, the US President, Donald Trump, has also mentioned that they are going well with the phase one trade deal. These reports have given a sigh of relief, reviving hopes of a balance in the global economy.

These positive developments have wiped off fears of a global economic slowdown that occurred after Mr Trump?s indication of signing a partial trade deal after November 2020. Earlier this week, he undermined hopes of resolution, stating that the deal might take place after the US Presidential elections. However, the two parties are now very close to signing the trade deal in the near future. Beijing has also offered official reassurance over trade negotiations with the US, renewing hopes.

RBA: Australia?s Economic Growth to Pick Up in 2021

Though the global economic growth is likely to speed up in the second half of the next year, the Reserve Bank of Australia (RBA) expects Australia?s GDP growth to gain pace in 2021. The recently announced data by the Australian Bureau of Statistics (ABS) demonstrates that the country?s GDP is growing at a very slow pace.

Australia observed an economic growth of 1.7 per cent through the year to the September quarter 2019 in seasonally adjusted terms, well below the market expectations. The major factor that drove the economic growth down was weaker consumer spending.

Economists believe that 2020 is going to be a tough year for Australia as the country continues to see slow economic growth, weakened growth in wages, high unemployment and record low level of interest rates.

However, a recovery is expected in 2021, driven by revitalisation of the established housing markets in Australia. The property market has also started showing some exceptional signs of revival, with the property values marking their largest gain since 2003 of 1.7 per cent in November 2019. The two most established property markets, Sydney and Melbourne drove the rise, witnessing an increase of 2.7 and 2.2 per cent, respectively.

Will RBA go for Another Interest Rate Cut to Stimulate Economic Growth?

Amidst slowdown in Australia?s economic growth, the speculations over the RBA?s next interest rate cut have begun. The RBA has already taken the interest rate level to 0.75 per cent to boost the country?s economy; however, weak consumption spending continues to weigh on Australia?s GDP growth.

The ABS has recently reported another disappointing retail turnover figures for October, announcing flat retail sales against market expectations of 0.3 per cent gain. The data suggests that the consumers continue to hoard the gains from recent tax cuts and lower interest rates. Instead, the consumers are increasing their saving and paying down debt from the gains. This was seen in the household saving ratio figure that improved substantially to 4.8 in October.

In addition to retail sales, Australia?s trade surplus has also narrowed by $2.34 billion to $4.5 billion in October against market experts? expectations of $6.1 billion.

As per Australia?s former Treasury Secretary, Mr Ken Henry, Australia?s current economic weakness is far more concerning as it seems to be driven by long-run secular issues. He thinks that the current situation is more than cyclical that can not be addressed by either fiscal or monetary policy. He believes that the core long-term problem in decline in the productivity that needs to be addressed.

In the present economic scenario, leading market experts are anticipating another cash rate cut early in 2020, with considerable chances of interest rate to move to 0.25 per cent. The RBA is highly likely to undertake unconventional policy measures if the interest rate dips to 0.25 per cent, revealed RBA Governor, Mr Philip Lowe in his recent speech.

Both the RBA and market experts believe that Australia now needs a fiscal stimulus to drive economic growth as monetary policy alone won?t be able to fix the slowing economy. Urging for an infrastructure boost, the RBA had also mentioned in its previous speeches that any further cash rate cut might not create the desired effect.

Recently, OECD, in its latest economic outlook, has advised the federal government to ease fiscal policy to support the country?s GDP growth. Responding to continuous demands of fiscal support, the Morrison government announced spending of $3.8 billion on infrastructure for the next four years. However, Australia needs a further support on fiscal grounds to create stabilisation.

News are doing rounds that the country might receive further fiscal stimulus from the federal government in mid-2020 to stimulate economic growth. Moreover, uncertainty continues over the RBA?s next move on interest rates.


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