World Economic Outlook And What It Means For The Australian Travel Industry

Transcript

Sarah Hunter:Good morning, it's a pleasure to be here talking to you all. As my introduction just said, I'm going to be giving a very brief overview of the global macroeconomy. I'll touch a little bit on Australia as well, and then I'll talk about where we see that going into the tourism industry. So what the outlook for the broad tourism sector here in Australia is. Just to introduce myself and the company I work for, I'm Sarah Hunter, Head of Australia Macroeconomics, and I work for a company called BIS Oxford Economics that some of you might have heard of. We're a macroeconomic forecasting consulting company, and we also have a tourism economics arm as well, so we're able to bring together the macro picture with that tourism detail, and hopefully I'll have some interesting insights for you guys this morning. So just a brief summary of what I'm going to be covering. I'm going to start off with talking about the global economy and where things have traveled over the last 6 or so months of 2018. And the question I really want to answer, or at least try and answer, is how worried should we be about the global economy? So 6 months ago, economists were getting quite excited about about the global economy. We'd actually seen some positive momentum building up over 2017, first time we'd seen a broad-based acceleration in the global economy since the financial crisis. So it was very nice as an optimistic person to be finally standing up at events like this and giving everyone some good news about what was going on. So this year, 2018, well, it did start very, very well. Then we hit a bit of a stumbling block, actually quite a dramatic stumbling block in some parts of the world economy. There was a real grinding to a halt almost of momentum in the first few months of 2018. And we were sort of, as economists, we were trying to work out what's going on. Is it temporary? Is it permanent? How worried should we be? Is it going to come back? Well, a good chunk of it was temporary. You can probably tell by the accent I'm a Brit working over here, and I was getting bombarded with complaints from my family and friends back in the UK about how cold and bitter the winter had been. That was widespread over Northern Europe. It wasn't just Brits moaning about the weather, although yes, we do like to do that. And in terms of economic activity, this actually matters because it means that we can't do as much construction activity in particular. Other sectors as well get weather-affected. People don't go to the shops as much because it's miserable and cold and they stay home, so they're not spending as much money. So that was definitely a drag. We also had a particularly bad flu season in Northern Europe, so a lot of people off work sick. Again, it shows up in the data. It sounds trivial, but it actually matters. There were, though, some other worrying— more worrying and potentially more permanent disruptions to global growth. You probably are all very aware of the recent uptick in oil prices. That's obviously a bit of a challenge in terms of travel and tourism. It's a challenge for the economy more broadly. It means people have to pay more to fill up their cars when they go to the petrol station, so they've got less money to spend elsewhere. Pushes up production costs for industry as well. So That's been a bit of a challenge recently. And I couldn't possibly, possibly do a global presentation and not at least mention in passing President Trump and US trade policy and tariffs. Yes, definitely an issue here in terms of the outlook for global growth. Interestingly, I think with the tariff story is what we've had announced so far in terms of tariffs have been put in place by the US and China bilaterally, also the aluminium and steel tariffs as well that were against a broader set of countries. They don't directly have a big impact, negative impact on growth. They do matter at the margin, but what we're much more concerned about is the indirect, insipid confidence impacts that these shocks have. So, you know, firms get concerned about the outlook. Gosh, am I going to be able to sell to China because maybe there'll be tariffs put on my goods? So I might not invest and expand my capacity because I'm just not sure anymore, whereas before I would have gone ahead. Those kind of indirect negative drags, that's what we're pretty concerned about. So thus far, we've not seen a big negative drag from the tariffs, and we don't expect to see a big negative drag from the tariffs. But clearly there's some risks around that, and with President Trump, he is quite a mercurial character, to say the least. And we, you know, we don't necessarily know what's going to happen next. So there is that negative drag there, and there are significant supply chain implications from particularly a broadening of those Asia tariffs, Asia-focused tariffs. So that's a brief summary of where we've got to. So a lot of the downturn at the start of the year, temporary factors. We'll get over the weather in the UK eventually, but some of it certainly was a bit structural. And so we do think that global growth has peaked in the first half of this year. So it's not bad news. I'm not telling you that it's a sharp slowdown in the global economy. That's certainly not what we're seeing. But we do think that momentum is going to gradually cool as we've hit that cyclical peak and things slow down a bit going forward. So a bit more detail on that. And I'll just do a quick runaround of the major countries. Well, starting with China. China's economy has been surprisingly robust this year, and they finished 2017 on a high as well, very strong growth last year. We're seeing this particularly in residential construction, but also in heavy industry, and it's comforting to see that despite that sort of tariff trade position, which they're obviously particularly exposed to given where that policy has gone with the US, that trade flows across the Asia region are still pretty robust. So there's some strength here, some underlying strength that goes outside of the traditional trading relationships that's really supporting China's economy, and it's symbiotic. China does well, that's good for Korea, Taiwan, Japan, Singapore, other countries in the region. We're also seeing from the authorities that they are very, very committed to that gradual slowing of growth. We see absolutely no signs of from the authorities that they want to shift that policy stance. They made it quite clear at their last major gathering, and that's what they've been implementing in terms of policy. So for example, 3 months ago they were a little bit concerned that maybe things were overheating. They tightened, but only a little bit, monetary policy— slight raise in interest rates, a little bit of the dialing back on credit growth to the economy. In the last few months have actually gone the other way. They've been a little bit concerned that maybe things have slowed down a bit too much, and they've loosened the reins just a little bit. We've seen the depreciation of the renminbi, yuan, as a result of that. So it's very, very gradual, very give and take. And given that, we do expect this gradual slowing in China's economy to continue as we move through this year, next year, and into the 2020s, as you can see on the chart. And that rebalancing of the economy that's going hand in hand with slowdown. That we expect to continue as well. So growth is going to be led by consumer spending, household income growth, and we are going to see a continued fall in investment share of GDP. Not that they're going to stop investing and expanding their productive capacity, they're just not going to be focused on growth in that area. So more of the same from China, really. I told you a similar story 6 months ago, and there's not too much change to report there. Across the broader Asia region then, as I said, it's, it's more good news, and Asia is going to be and continue to be the driver of the world economy over the medium and into the long term. It's got the majority of the world's population right now. It's the dynamic part of the world economy. At the margin, it's where we're seeing that additional growth coming through. So to touch briefly on other countries, We're becoming more optimistic, although perhaps cautiously so, about the outlook for India. The policy reform agenda there continues to move forward at a fairly steady pace. Fits and starts, as is inevitable with that kind of process, but the government there are committed to putting in place structural changes that will give the economy a firm footing, and we think growth in India should top 7% this year. See a similar pace next year, and then, yeah, again, gradually slowing, largely to reflect demographic shifts and a general slowdown as you move up in terms of income levels, but not significant. So India is actually set to overtake China as the fastest-growing large emerging market in the world economy as we move forward from this year. Other economies in the region also set to do well. Indonesia, Philippines. These are countries that will also see fairly rapid growth over the 5 to 10 year horizon. Big potential, starting from relatively low income levels, young populations, so they've got that demographic dividend supporting their growth. And again, the reform agenda in those countries is in place and the governments are moving in the right direction. Fits and starts, and there will be challenges, but it's a positive story. And that then spills over to the broader region, and the wealthier, higher income countries also benefit. Hong Kong, Taiwan, Korea. These countries are all very interlinked in terms of Asian supply chains, so they're going to do well as well. And in summary, that's why we get that nice-looking chart there where you have Asia driving growth relative to other parts of the world economy. Turning my attention now back towards the US and developed countries more broadly. Well, the US— some of you may have seen— they released Their GDP growth numbers for the second quarter of the year, so for April to June last week, came out roaring, 4.1% annualized growth, best they've done in a long time. It's not a surprise given the fiscal stimulus that we've seen that was enacted in the first 3 months of the year. So that's the combination of the tax cuts, the corporate tax cut in particular, but also the budget plan. There was a significant amount of fiscal spending stimulus put through in that budget plan. And as you can see from this chart, that's going to be a significant supporter for growth this year. We do think the— that the pace of growth will slow from that 4%. The US doing 4% is way, way faster than its potential, so it was inevitably going to slow. But we think we're going to see 3% growth for this year, which is not to be sniffed at for a developed country. That's pretty good going. As you can see though, a good chunk of that growth is from that fiscal stimulus. So the 2 light blue bars at the top there show you the size of the contribution from that. And as that drops away after 2019, so when all of that additional stimulus has fed through the system, growth in the US is going to moderate and come back down towards more like 2, 2.5%, which is its underlying pace of growth for the economy. So good news for the US in the near term, and I'm certainly not standing up here saying we're likely to see a recession in the next 12 to 18 months. We think that the footing for the economy there is pretty sound, and there's still some steam to go, some momentum to come through the system. Moving on then to talk a bit more about Europe. Here it's not a disaster story, but it's perhaps not as positive as some of the other countries and regions that I'm going to cover. So as I said, Europe really started the year with an absolute flop— weather and illness related, but also the, the cooling off the cyclical acceleration we saw in 2017 caught us off guard. It was, it was quicker than we were expecting. We have seen a bit of a recovery in momentum, and I think comfortingly we're starting to see a wage growth come through, which will be supportive for consumer spending. But generally for Europe, we think that we've hit a cyclical peak and that growth is going to slow as we move forward. It's also worth flagging for Europe that there are some structural challenges, political challenges, that, that the region's got to face. Hold that thought on Brexit, I'm going to get to it on my next slide. But beyond Brexit, we have also got the political situation in Italy and concerns there around debt sustainability and government policy and how the new populist government are actually going to manage the reform process that Italy needs to go through. And, you know, other concerns more broadly across the eurozone around, you know, integration and sustainability and dealing with Greece and that sort of thing. So challenges for Europe for sure, but still, you know, Solid, not spectacular outlook. Yes, Brexit. Well, I couldn't be a Brit and give a Global Outlook talk and not talk about Brexit. I will try not to collapse into a puddle of tears over this, but it is pretty disastrous politically. It's not an exaggeration, sadly. And the political process around Brexit, for those that have kept up with this, has obviously been sort of lurching from one crisis to another is the best way to describe it. You know, we've had a spate of cabinet resignations over the policy. We've had the European negotiating team coming back and saying they're not comfortable with the direction and how it's going. And now we're starting to hear scare stories about stockpiling food just in case the UK crashes out of the EU in March next year. Okay, so there's a lot of, you know, sensationalism going on there. What do we think is actually going to happen? Well, there is a risk that the that the UK crashes out in March 2019, that they don't actually put something in place by then. We think that is a relatively small risk. We don't see that as the baseline trajectory. Nobody has an incentive for that to be the case. It would be bad for Europe as much as it would be bad for the UK. So we do think that there'll be some interim agreements. Negotiations will continue, and that the actual you know. proper exit will be sometime down the track. Formally, the UK will leave in March 2019, but we think that there will be an interim agreement which will essentially say everything as it is right now still applies. So no change day-to-day, basically. So we do think that's what's going to happen, and that down the track there'll be a formal leaving agreement. In our view, we think that it will be a hard Brexit. Not a soft Brexit, so very certainly controls over migration to limit the movement of people. We also expect there to be some significant tightening up or more restrictions around the movement of services. This is going to be particularly challenging for the City of London, but we think that the the movement of goods that will be preserved. They will come to some kind of quite comprehensive free trade agreement that will preserve the close to the current. Current status quo in terms of movements of goods. So, so it's, it's not a great story in terms of the politics, and it's not a great story in terms of the economics as well, unfortunately. Consumers have had a hard time of it over the last couple of years because of the depreciation of the pound. It's made it very expensive to buy a lot of the goods and services they're used to buying. And for businesses, we're seeing them understandably pull back quite a bit in terms of their investment plans. That uncertainty I was talking about earlier on around Trump tariffs, that's sort of on steroids when it comes to Brexit. If you just have no idea what your trading and operating environment is going to be, it's understandable why firms don't want to invest. So we're seeing that come through as a real drag on GDP growth, and the UK has definitely been the underperformer of the developed economies over the last couple of years, and we think that will continue. Until we get some resolution. So, so that's a very brief whistle-stop tour of the world economy. I'll just quickly touch on closer to home, and then I'll finish up with a few comments on what we see this meaning for the Australian tourism economy. So just briefly, well, close to home, the bad stuff— I'm going to start with that first. Consumers, households— I think you don't have to be too avid a follower of the papers to realize that households are struggling at the moment. We've got stagnant real wages, stagnant real household income growth, and that just makes it hard to spend money. So in terms of GDP growth and the economy more broadly, households are the thing that's holding us back at the moment, and consumer spending momentum is pretty weak right now. The good news though, firms are coming back to the party. The key takeaway from this chart is that all of that big negative stuff that we've had in the last few years that's mining sector related, that's now largely done. So business investment is now starting to contribute positively to growth. The non-mining business sector is really doing very well, and they're starting to expand their capacity. They've got nice profits coming in, and so that's going to be a supporter for the economy over the next couple of years. So we think GDP growth for Australia is going to be around about 2.5% this year and next. And then as some of the headwinds facing consumers die away, we should see us accelerating close to that magic 3% number. And just to finish up, what does all of this mean for some of the drivers for tourism and then for the sector more broadly? Well, just to touch on the Aussie dollar briefly, we think we probably see a little bit more of a depreciation, certainly against the US dollar where we've seen a bit of a turnaround in recent weeks, but against the broader basket too. That's obviously going to be helpful, but it's not a big move, so not too much happening with the Aussie dollar. It's moved a lot against the US dollar, it's moved a bit against the sort of broader basket of currencies this year. We don't expect to see too much more going forward. For oil prices, we think that there probably is some more upside or rising price risks going forward. We see there are still some disruptions that are likely to affect the market over the next few months. That's going to put some upward pressure on oil prices. And as I said at the start, that global growth momentum, yes, it's slowing, but it's not terrible, and that's going to give some support to demand. So a few supply issues, still got strong demand, bring those 2 together and you get some upward pressure on prices, which, you know, can be obviously a bit of a challenge in terms of airfares and things. So all in all then, we see in terms of international arrivals Bit of a slowdown from what we've seen in recent years, but still really solid growth. That Asia story where we've got incomes rising, growth in the middle class, that's really going to support international arrivals into Australia, and you don't need me to tell you that's the single biggest market. So it's generally good news there. In contrast to that, the domestic tourism, so the domestic leisure travel, that's going to be the area that's, that's going to be challenged. And that really is a part of that income growth story. Consumers are challenged across the board. That applies as much to their spending on domestic travel and tourism as it does to their spending on household goods, clothing, footwear, what have you. And just to finish up, to touch on businesses, here we see broadly building momentum. It's almost the mirror image of consumers. It's been a tough couple of years there with the end of the mining investment boom and the pretty subdued domestic economy for the non-mining sector. That's now turning around, and we're starting to see that come through in investment spending, and we expect to see that coming through in travel spending as well. Oh, uh, thank you very much.

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