Financial downturn signals flashing red

Investors are sensing trouble and word searches for “recession” have spiked.

The US government shutdown is likely to affect GDP. Picture: AFP.

Perhaps you haven’t realised but 2019 is shaping up as the most uncertain year for the economy since the financial crisis struck a decade ago, prompting governments and central banks to intervene on an unprecedented scale.

Investors sense trouble, at least. The world’s biggest stockmarket, on Wall Street, has shed trillions of dollars in value since it peaked in September. The second biggest, Japan’s, has had the worst December slump since 1949. The bond market has given the global economic outlook a big thumbs down, dragging the yield on 10-year US government bonds back below 2.8 per cent.

“Many of the financial and economic indicators that signal the start of a downturn are now flashing red in advanced economies,” says Simon MacAdam, an economist at Capital Economics in London.

Word searches for “recession” on Google have spiked to the highest level in five years.

A fresh bout of uncertainty over the Trump administration hasn’t helped. US legislators yesterday failed to make a breakthrough in the row over President Donald Trump’s demand for a wall across the 3200km border with Mexico. After convening for a few minutes, a nearly empty Senate adjourned, deciding to renew budget deliberations next Wednesday, the last day of the current Republican-controlled congress.

That would take the government shutdown to 12 days. Both sides have dug in, with Democrats refusing to provide $US5 billion ($7.1bn) for Trump’s wall. The President has insisted he will not fully fund the government unless he gets the money.

The resignation of Defence Secretary Jim Mattis, thought to be a steady hand on a mercurial President, and a bungled attempt by Treasury Secretary Steven Mnuchin to calm financial markets have amplified concerns.

JPMorgan reckons each week of the shutdown in the US government, which employs 800,000 civilian employees, will reduce gross domestic product growth by about 0.1 to 0.2 percentage points.

“The 2013 shutdown did have noticeable negative effects on some measures of consumer and business sentiment … but it is possible that an extended shutdown right now could interact with market declines and already weakening economic data to produce a larger drag on sentiment and the overall economy,” JPMorgan’s Daniel Silver says.

Headline US growth figures have held up but economists increasingly ponder whether the US expansion since 2009, the second longest in that nation’s history, is about to peter out.

All is quiet on the consumer front at home, though. Australians’ expectations about the economy remain “well above average”, according to Westpac’s December survey of 1200 Australians.

“At a time when house prices have declined significantly in Sydney and Melbourne, and there ­remains unease over real wages growth, this is quite a remarkable result for sentiment,” Westpac economist Elliot Clarke says.

David Plank, head of economics at ANZ, says similar results emerged from a parallel survey. “In this final survey for the year, consumer sentiment finished well above average,” he says.

Perhaps respondents hadn’t checked their savings recently. Not since 2011 have both capital city house prices and blue chip shares ended the year in the red.

House prices in Sydney and Melbourne are down at least 6 per cent over the year, ahead of a likely further 10 per cent fall based on conventional forecasts.

The benchmark S&P/ASX 200 share index has dropped more than 11 per cent since August. For superannuation funds, half of whose assets or about $1.3 trillion are in Australian and international shares, it could end up the worst year since the financial crisis.

The one bright spot has been the labour market, where strong jobs growth — albeit without much wage growth — has dragged the unemployment rate down to 5 per cent ahead of further falls if the local jobs market follows the same trend in Britain and the US.

It’s not enough, though. Prices in financial markets now put the chance of a cut in official interest rates during the next 12 months at one-third — awkwardly for the ­Reserve Bank, which repeatedly has said the next move in rates more likely will be up.

In Britain, the likelihood has been growing that the government’s EU deal will fail in a vote in the House of Commons on January 14, making a “hard Brexit” more likely. If Britain proves the “remainers” wrong and thrives outside the EU, other countries will seek to loosen their ties with the multinational government in Brussels.

Meanwhile in Canberra the government looks set to change for the first time since 2013. Governments tend to sink or swim on the back of global events. The long shadow for the 2008 financial ­crisis — meagre wage growth, soaring asset prices and growing anger with the financial services community — have hobbled attempts to reform taxation or spending.

The Labor Party has promised to increase tax on shareholders (make franking credits non-refundable), property investors ­(restrict negative gearing to new “dwellings”) and higher income earners (lifting the top marginal tax rate to 49 per cent).

Elections next year also are due in Canada, Greece, Finland, Denmark, Poland, Switzerland, Israel, Argentina, South Africa and India.

“The risk is that the political fringes on the Left and Right continue to gain ground at the expense of the Centre, and that nationalism and tribalism, and frustrations with so-called political elites, dominate the debate,” says John Llewellyn, former Lehman Brothers chief economist in his December note to investors.

The Coalition’s planned surplus, pencilled to amount to $4bn next financial year, is vulnerable. At 0.8 per cent of total revenue, it’s a rounding error that could be wiped out by a spending increase or slowdown in tax collections. A pre-election announcement by the Treasury, which under the Charter of Budget Honesty must update the budget forecasts, could hit confidence precisely when it is needed.

The banking regulator appears to be more worried than consumers about the slowdown in credit growth, recently ditching a “tough” new rule, not yet two years old, to cap the “interest only” share of banks’ new home loans at 30 per cent.

The year 2009 didn’t turn out as badly as some had feared, largely because governments had scope to stimulate their economies. Now they don’t. Global debt has climbed to $US250 trillion, up from $US177 trillion in the first half of 2008. Adding more credit or money to the economy artificially may undermine voters’ confidence in authorities’ abilities to regulate effectively and fairly. Indeed, attempts to start weaning economies off emergency monetary policies, still largely in place a decade later, are a major part of the uncertainty economies now face.

Additional reporting: Agencies