Global growth to moderate soon, Deutsche Bank tips

This is as good as it gets. That’s the message about global growth from Deutsche Bank’s global head of research.

Deutsche Bank's global head of research Michael Spencer

This is as good as it gets. That’s the message about global growth from Deutsche Bank’s global head of research, who expects economic growth in the US, Japan and Europe, the world’s biggest advanced economies, to slow over the next few years.

Michael Spencer, the German banking giant’s head of research and Asia-Pacific chief economist, said growth in the euro area would fall from 2.3 per cent this year to 1.7 per cent next year in sympathy with falls in the US and Japan.

“There’s a little bit of upside risk but we’re peaking about now,” he told The Australian while visiting Melbourne last week.

“That global growth impulse is unlikely to get a lot stronger,” he added, suggesting growth would be “notably weaker in most economies” next year.

Mr Spencer, who also weighed in Australia’s company tax cut debate, said “very robust if not worrying” inflationary pressures were building in China, where the IMF expects growth to slow.

“Where the prevailing view is China is beset with excess capacity I see the opposite: industries with very strong pricing power throughout the whole supply chain,” he added.

The International Monetary Fund, in revising up its global growth forecasts last month to almost 4 per cent for both 2018 and 2019, said 120 economies, accounting for three-quarters of world GDP, had seen higher growth in 2017, which had been the broadest synchronised global growth upsurge since 2010.

Asked about wage growth, Mr Spencer said the message for Australia from the European and US experience was that wage growth could stay lower for longer. “We’ve had to wait until labour feels like it has the bargaining power to ask for higher wages again,” he said. “We’re seeing very robust employment growth but wage growth still feels kind of weak.”

Australia’s wage price index rose 2.1 per cent last year, a little faster than inflation, thanks mainly to a 2.4 per cent rise in public sector wages.

Mr Spencer also weighed in to the local company tax debate, suggesting it was “quite unlikely” the Turnbull government’s policy to shave company tax by 5 percentage points by 2026 would shift investment from other countries to Australia.

“Far more goes into decisions to invest than the marginal corporate tax rate,” he said, suggesting for instance that China’s corporate tax rate wasn’t a major consideration for the multinationals that had invested there.

“The argument we need to lower taxes simply because others have is oversimplifying … To move a plant from Europe or US to Australia, a lower tax rate isn’t going to incentivise that shift,” he said.

“Australia government runs relatively modest deficits but at this point in the cycle I’m not sure how wise it would be to be cutting taxes and running larger deficits.”

Reserve Bank governor Philip Lowe in testimony earlier this month said tax cuts needed to be accompanied by spending cuts so as not to delay the scheduled return to surplus.

“Consumers can easily absorb interest rate increases that we’re expecting,” he added, suggesting a greater level of comfort with household debt.